According to the U.S. Bureau of Labor Statistics, 20% of start-up businesses fail during the first two years and around 50% fail in the first five years. This can be discouraging to startup entrepreneurs who are looking to start a business. Let’s look at the five biggest mistakes small businesses can make and the potential pitfalls of starting a small business.
Skipping the Planning Stage and Setting Unrealistic Financial Goals
If your small business does not have a solid plan, you might be lost when issues present themselves. So, how do you start planning for business success? Begin with a thorough business plan, financial plan, and marketing plan. In the early stages of starting a small business, there needs to be organization and goals.
Organization will help you prepare for the crazy curve balls that might get in the way of your goals. One way to set measurable goals for your business is through the SMART method: specific, measurable, accountable, realistic, and time specific. This will ensure progress for your business, which is critical in the early days.
The best way to plan and set financial goals starts with writing them down and planning out a budget. If you create a plan from the beginning and stick to it, this will organize your business. It would also be smart to create an emergency savings account for any situation that sways away from your plan. We’ll talk more about the importance of cash flow below. Set deadlines and do your best to meet them so your business can continue to grow.
Fear of High Small Business Failure Rate
Lack of confidence and the fear of failing might cause you to under-value your product/business. This can be apparent when pitching to an investor. The fear of failure might include being afraid to lose customers or lose money.
There are signs of business failure that you can look out for. To avoid failure, the business should set high expectations and stray away from procrastination. You can also exchange your fear with patience. Focus on the pursuit to success and don’t delay decisions which will ultimately switch your mind away from fear and towards determination.
This makes the business owner dwell too much on what others think, which ultimately will hold them back from pursuing their dreams. Confidence in their ideas and business plan will also help inspire confidence in team members they add. If they do not have confidence in their own product/business, who will?
One of the most important steps when starting a new business is market research. Understanding the customers and where else they might go for your product or service is a critical piece of your long term success. Assuming that there is no competition is one of the most common mistakes small businesses make, and can drive a business away from understanding its uniqueness. Analyze why a consumer would choose another business/product over yours—this will create a competitive advantage as you build your business to better meet their needs. It will also encourage faster development of the products and services that set your business apart.
Trying to do Everything Yourself
Because of their passion and expertise, startup entrepreneurs can fall into the trap of taking on too much of the burden. One of the best ways to avoid burnout and tunnel vision is to find trusted team members and delegate.It is better to understand your own strengths and weaknesses and then distribute the work. Not only will this help team members grow and add value to a business, but it will also free your time to focus on your greatest areas of impact.
And while relying on one leader can be dangerous, so can relying on a small group of customers. You should always try to avoid a position where your business is overly exposed if it loses one large customer. If at all possible, spread your cash flow and profit dependencies across more accounts to offset risk. It can also relieve pressure on leaders to make unwanted compromises with one account to the detriment of other customers. The less your business depends on a few customers, the better you can take care of all your customers.
Failure to Recognize the Importance of Cash Flow
It can be easy to mistake profit and cash flow. The truth is, profitable companies can fail due to negative cash flow. Understanding the difference and how to maintain a healthy cash balance can help your business seize opportunities and navigate unforeseen business hurdles.
Negative cash flow means there is more money going out than coming in, which makes covering expenses much more difficult.This can happen to profitable companies that might report strong revenue and a healthy bottom line, but have cash tied up in illiquid assets such as unpaid invoices.
Regular cash flow analysis can help a company keep up with the money coming in and going out, which will produce better support when making decisions for their business. A positive cash flow helps a company meet their financial obligations and helps a business owner plan for the future. If you discover cash flow red flags about your business early you can correct spending habits, investments, or income management to improve your position.
In such a competitive space, small businesses must have a strong foundation with strong leadership to ultimately be successful. Understanding the pitfalls of starting a business can be beneficial when driving a business from the ground up. By avoiding these common mistakes small businesses make, you’re on your way to fulfilling the dreams that inspired your commitment to build a business.