Entrepreneurship is an indicator of a transformative and growing economy. The importance of businesses in an economy can’t be overstated enough. Businesses offer revenue to the government through the payment of taxes; they help the government reduce the rates of unemployment, bring into existence new and life-changing technologies. Businesses also play a key role in giving back to the society.
The talk of new businesses inspires optimism and promise. According to Forbes, more than 500,000 new businesses start each month in the U.S.A. However, the majority of these new establishments don’t grow to become major businesses, they fail; eighty percent of entrepreneurs who start businesses fail within the first 18 months of establishment.
From a Small Business Administration research, only fifty percent of startups survive the first five years, and only thirty-three percent of them survive for ten years. From this, it can be concluded that only a half of new businesses reach the five-year mark and this os a worrying failure rate of fifty percent.
While external forces such as shifts in product demand can spell doom for a business, there are mistakes that entrepreneurs make that condemn their enterprises to failure.
Here are 10 mistakes that new business owners should avoid:
1. Inadequate Savings for a Start-Up
Business owners must have enough money to sustain the venture during the first months before the business breaks even. The inadequacy of cash reserves during this critical period can significantly reduce the prospects of success. It is imperative for you to have enough personal savings because you can’t depend on a bank loan or Small Business Administration (SBA) to fully finance your business because they won’t. Moreover, investing more of your personal money into the business boosts your creditworthiness in the eyes of financiers as it demonstrates an ability to repay the loan. With enough savings, you will be able to predetermine your business destiny and your savings will push the business to stability.
2. Unrealistic View of Profit Making
A major pitfall for several new entrepreneurs is trying to get too big, too fast. However, a business can’t start making huge profits from the onset. The Startup Genome Report states that ninety percent of startups fail due to self-destruction rather than competition. New entrepreneurs fall into the temptation of accelerating too fast, too soon even in instances when scaling up is not the next reasonable and logical step. Instead of trying to hit unimaginable and often unrealistic profit targets, you should ignore early adopters and scaling and focus on the customer and the market you are targeting to improve your products and services.
3. Unnecessary Expenses
A good proportion of new entrepreneurs inject a lot of their startup money into the business even before they strike a positive cash flow. This is due to an assumption that continuous capital input means growth. However, this is a wrong assumption. New businesses should cut unnecessary expenses through adopting sound accounting practices. As recommended by Quickbooks, these expenses can be reduced by embracing cost-cutting measures such as outsourcing particular business functions like auditing, negotiation for smaller interest rates on credit, negotiating with suppliers for lower and favorable prices but at the same time keen not to compromise quality. Besides, you can avoid perpetual payments case in point, by opting to buy space rather than rent. You can also re-evaluate complex expenses as for example, if you want to lower telephone bills, you can use email for your business communications instead.
4. Lacking a Business Plan
Several new business owners don’t plan adequately or fail to plan at all. Formulating a business plan for that matter may be a tedious process but it is worth the while in the long run. A business plan is a solid foundation on to which the business stands. You need to know workforce requirements, legal cut-offs, target market, administrative requirements, the scope of the business, sources of financing, business and reporting structures, competitor analysis, sales and market forecasts to mention but a few.
Such information will help the business owner determine the size of staff, starting capital and also be prepared for any upsets that may come up along the way. Planning is critical because failing to plan is planning to fail.
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5. Not Chasing Unpaid Invoices
It is common for some businesses and clients to not pay their invoices on time even though this could result in the disruption of a business’ cash flow which will interfere with some of its day to day activities. New investors suffer when they fail to aggressively chase unpaid bills, some of which could degenerate into bad debts. Atom Content Marketing notes that small businesses can avoid unpaid bills by making the client aware of the terms and conditions of invoicing, assessing the client’s creditworthiness and sending out invoices early enough to allow for enough time to chase for payment. It is your money, chase it and when you do it you will get it. Remember bad debts will cripple your business.
6. Lack of Protection of Personal Assets
Uncertainties are inevitable in the course of doing businesses. One unfortunate event can be catastrophic enough to kill a new business. New investors face this challenge because of uninsured personal assets and when such risk occurs there is no compensation to cover the risk. This would have been avoided had you transferred the risk to an insurance company. Insurance ensures that the business can get on its feet even after a tragic asset loss. To be on the safe side, you’d better purchase liability insurance. According to John Boitnot, a Digital Media Consultant and Investor, there is a broad range of insurance covers small businesses can purchase. For example, Property Insurance, Professional Liability Insurance, Workers Compensation Insurance, Product Liability Insurance, Vehicle Insurance, and Business Interruption Insurance.
You can also structure your business as a corporation or limited liability company in order to avoid bearing the risk as an individual through the separation of your personal liability and liability of your company.
7. Hiring Employees
Businesses, even new ones, require adequate staff in order to efficiently function. For new entrepreneurs, this could prove quite costly because apart from salaries and allowances, you have to pay for staff insurance, too. To reduce this extra cost of hiring, you could hire an independent contractor for example, instead of employing auditors and running an in-house accounting department; as a startup you could hire an independent audit firm to handle this activity, instead. Utilizing the services of an independent contractor is often cheaper as there are many of them competing in the same market.
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8. Lack of Contingency Financing
In the course of doing business, there will be several unexpected increases in your costs. For example, energy, labor, raw materials and also unplanned but important payments may always arise. In the event of such occurrences, many new business owners suffer because they lacked an emergency fund, a credit line or reserve capital. As according to allBusiness, this can be easily averted if you plan for seasonal drops and unforeseen expenditures. It is wise for all new business owners to have an extra fund to save for unforeseen expenditures.
9. Renting an Expensive Office Space
Starting a new business requires securing office space to facilitate carrying out the day to day operations of the business. However, this need for office space often leads new businesspeople into making mistakes. You could rent a very expensive office space or even rent a big office space; this circles back to the problem of overspending- a problem many new businesses grapple with. New ventures, as Brian Hughes, CEO and Founder of Digital Marketing Expert at Integrity Marketing & Consulting recommends, should consider the most appropriate and cost-effective office space options. These include starting with a home office which practically eliminates the need to rent office space, encouraging office sharing to avoid renting a large office space and approaching incubators and accelerators who in addition to providing financing and mentorship, provide office spaces for new businesses.
10. A Wrong Business Structure
A business idea can be a winner but still suffer due to poor execution brought about by an inefficient and hurtful business structure. For example, lack of or inadequacy of proper systems and processes to ensure proper customer service or product flow and checks to monitor their efficiency leading to product failure. The business structure ought to breathe life into the product. It should be one that puts emphasis on proper customer service, employee competence and proper channels of management.
Businesses thrive on practical and efficient systems. New investors should therefore work on nailing profitable business models and structures with a proven revenue stream in addition to making sure that it suits their business needs and potential liability. Depending on the nature of a business, structures of Sole Proprietorship, Partnerships, Limited Liability Company and Corporation should be adopted.
As a new business owner, you now know what to avoid in order to ensure perpetual growth and success for your business.
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