A man drove past a lovely plot of land for sale at a bargain price, in an area where he envisaged building his dream home.

Before buying he had the foresight to take along an expert who advised him that what appeared to be a patch of mud was actually quicksand. He suddenly got a sinking feeling in his gut and immediately aborted the deal.

A year later the man was retrenched and being unable to find employment used his funds to establish a small enterprise. Although he lacked experience, he felt he knew enough to go it alone, deciding to improvise as he went along.

He started the business, without realising that by operating in this manner he was back on quicksand with potentially devastating consequences. He closed his doors two years on.

Whilst he understood the benefits of consulting with an expert in the first instance he was unwilling to do so when it came to the establishment of his business.

To be objective, some SME’s are extremely successful, but with some estimating that only a third of new start ups make it to their fourth year, this post sets out to examine a number of potential SME problem areas and to recommend ways to deal with these issues.

1. Lack of expertise and market research

Many start trading simply on the basis of an idea, but without the appropriate skills or experience or even basic research to establish market parameters, consumer targeting, competitive activity and more.

In order to improve the probability of success, it is important for those establishing, or wishing to grow an SME, that they acquire the necessary expertise through training, or hire those who can fill the gaps. In addition to expertise, relevant experience will tip the scales even more in the right direction.

As regards market (and marketing) research, adequate information can sometimes be sourced online.

Of relevance, however is that bad methodology or incorrect interpretation can be even more devastating than a lack of research.

Some years back I consulted to one of the world’s top advertising agencies in relation to an expensive advertising campaign that failed miserably in the white goods sector.

The strategy on which the failed campaign was developed hinged on a number of group discussions which I established had fatal errors on a number of fronts including the selection of participants, methodology and interpretation.

Some years later I lunched with the CEO who advised me that whilst my report had ‘helped put things right,’ that my findings were never disclosed to their client. Frankly, I was not surprised.

Depending on their stage of development and research requirements, SME’s can resort to online research companies, syndicated research questions or work alongside a consultant with the right strategic expertise.

2. Inadequate Business Model, Planning and Vision

Many SME’s start without thinking through their business model, which sets out to establish the rationale of the organization, the manner in which it operates and how it sets about creating and delivering value for all stakeholders.

For example, if you are going to sell books will it be from a physical outlet, an online store or both?

Will you specialise by category e.g. educational titles only or stock a general selection? Will you have a loyalty program in place and if so how will it operate? What makes you different from your competitors?

Will your point of difference enhance the experience of buyers and the target market? If so, how?

Business models have consequences. If, for example, you choose to have low mark ups on your books you need volume sales. An important aspect of a business model is whether or not you have, or can afford, the resources needed to deliver the chosen model.

Many SME’s fall short when it comes to planning across a wide range of areas including strategic planning. Reasons for this include a failure to understand the need to plan, a lack of expertise, lack of time or the inability to afford professional help.

SME management can find business model templates online at no cost however should be aware that a plan is only as good as the thought and consideration that went into making it.

Many SME’s are born without vision and are unable to see where they are headed. Before an SME can determine its best strategy it has to know where it is and where it’s going, otherwise how can it determine the best way to reach its goals?

Some years back and before the advent of Specsavers and similar brands, I was asked to consult to a company in the eyewear sector.

I advised them that international trends showed that heavy discounting of glasses, lenses and other eyewear was on the rise and that they should take notice of this. Their myopia proved costly.

3. Failure to understand Brand Potential and the Lack of a Marketing Plan

Many SME’s I have worked with don’t realise how important it is to build a brand with the potential to become a valuable asset. To illustrate the point, some companies like Disney have a brand value component estimated to account for more than half the entire value of the company.

The principle whereby a brand has the potential to be of considerable value holds for organizations of all types and sizes. Some SME executives believe that all that is needed for a brand to succeed is a name, logo and tagline (and in many instances fail to optimise even these).

Areas of importance in terms of a brand’s development and strategy include a situational analysis, mission and vision and brand identity including core and extended values.

Brand positioning, execution, management and measurement are other key areas that require development.

In addition to the above, many SME’s lack a marketing strategy to provide direction. Many are unaware of even the most basic of concepts like the 4P classic marketing mix.

SME’s could begin by resorting to online resources to acquire an understanding of brands, branding and marketing and subscribe to online newsletters that build an appreciation of these areas.

4. Inadequate Financial Skills and Discipline

Many SME’S experience difficulty in areas related to finance. These include, but are not limited to the following:

• There is often a failure to perform expert due diligence when purchasing an SME which results in an overpayment for the business relative to potential earnings. Before purchasing any business including a franchise it is well worth consulting relevant financial and legal specialists to appraise the offer objectively.
• Lack of financial planning, forecasting, budgeting and poor financial management. SME’s need to establish a system, with the help of a professional, that enables them to identify and monitor key performance indicators (KPI’s), as well as detecting significant deviations between expected and actual outcomes.
• Poor cash flow. Many SME’s experience cash flow difficulties at some stage of their business. In this regard SME’s need to monitor their cash flows carefully and take relevant action. SME cash flow management should incorporate the use of ratio techniques to uncover trends in the financial soundness of their organizations.
• Bad debts. Although somewhat obvious many SME’s don’t conduct sufficient credit checks on clients or having done so on a single occasion feel that no further credit checks are required. An early warning sign occurs when clients that have traditionally met your payment terms suddenly take far longer or don’t pay in full. The impact of bad debt is heightened in instances where the bulk of an SME’s income is dependent on a single source. Some banks offer guidelines to assist small business whilst specialist credit reporting like Dun and Bradstreet (http://dnb.com.au ) can play a valuable role. Trade credit insurance can also be sought through QBE (http://www.qbe.com.au/Business/Trade-Credit/Insurance.html) and others.
• Reliance on a single supplier. SME’S that rely on a single supplier can run into financial problems when it comes to renewing a contract. To illustrate this an SME that is dependent on a large company to supply an active ingredient was recently told that to renew its contract it would have to accept a 40% price hike on a ‘take it or leave it’ basis. The particular ingredient is highly specialised and finding a substitute involves a costly and time consuming search. Unless sourced timeously it will severely impact the company financially. Before embarking in a particular direction, SME’s should ensure that there are alternative suppliers so that they are not held to ransom.
• Overtrading. Some SME’s run into financial difficulties by overtrading. By expanding too rapidly they run the risk of incurring costs substantially beyond anticipated revenue. This is particularly disadvantageous when fixed costs e.g. in the form of lengthy leases are undertaken without the necessary expertise and risk management procedures are not in place. Professional advice is the best option in this instance.
• Capital Raising Problems. Many SME’s require capital at different stages of their development and failure to procure funds can severely inhibit an organization’s growth. In this regard many options need to be assessed including factoring, asset based finance, debt, equity finance, opportunity based funding (using firm orders or new contracts) or trade credit, etc. Seeking independent expertise to assess which option is optimal is advised. In this regard banks, accountants and professional consultants are all viable sources of advice.

5. Lack of Direction as regards human resources and training

Quality people are the most important asset for any organization.

Many SME’s, especially start ups, lack the funds and credibility to attract the calibre of person they need. Without proper management and excellent staff support an organization cannot reach its potential.

Whilst fund raising can assist to attract higher calibre staff, another possibility is to incentivise a suitable partner for their skills, even if their contribution is not on a full time basis.

Another option is to outsource expertise on an affordable fee basis. As an organisation grows, organisational structures, HR programs and retention strategies need to be developed.

The delivery of professional training courses, workshops and similar enhance skills, support competence and help instil a more competitive mindset. In addition service levels are also progressed. This in turn benefits your brand, as management and staff are both important ambassadors for your organization.

SME’s should work with a credible supplier of professional human development courses to undertake training courses most relevant for their needs. In addition they should investigate training courses that are subsidised by Government as these can be extremely beneficial.

Whilst there are many other areas of potential difficulty for SME’s this post has identified some of the key issues for consideration.

Alan Kaplan PhD is an executive director of Optivance 360 a multidisciplinary consultancy that helps SME’s grow and flourish.

Alan’s international experience spans more than twenty five years across academic, media, agency, client and consulting areas. Alan’s profile can be viewed on LinkedIn.