If you read some of the statistics, starting a small business can seem almost doomed to failure. Though it is true that half of all small businesses do not make it to the five-year mark, these statistics do not tell the whole story. Many of the businesses close for reasons other than failure of the business. The entrepreneur may have experienced a change in life circumstances such as illness, the need to relocate, or simply received an offer to join another business and it made the most sense for their situation. Some small businesses, especially freelance business, may have only been designed to fill a gap between employments or some other time-limited reason.
Businesses do fail though. Anyone considering starting their own business should accept that fact and know the reasons why most of these failures happen. Learning from the mistakes of others helps you increase your odds of success. Let’s take a look at the primary reasons new businesses fail during the first five years:
1. Not Understanding the Market: If your dream has always been to open a coffee shop and bakery, but you live in an area saturated with those types of businesses, your odds of success decrease dramatically. This is a mistake that sets you up for potential failure before you open your doors. Research your market, know who your customer base will be and make sure you are filling a niche that isn’t already oversaturated.
2. Failure to Plan: A business plan is the pre-determined structure of your business. It is not just something you need to garner investors or financing; it is something you need to clarify your own goals and plans for the success of your business. In its most basic form, it should outline your realistic goals and a plan to meet those goals. It will establish timelines and deadlines that need to be met and contain any market research you have done.
3. Secure your Operating Capital: Whether you will need financing, or you plan to use your own savings, you need to make sure you have enough money to get your business started, and to keep it going until you can become solvent. The amount of capital you need will vary wildly depending on the type of business you plan to start. This is another area where you need to do in-depth research. If you plan to start a new business as a freelance writer, and your spouse can cover living expenses, then your capital needs are small. You will need a good computer, dependable internet, a few other staples and you are ready to go. If instead, you plan to open a company to offer green energy solutions, you will need a large sum of money to start and an unknown time-line to turn a profit.
4. Not Knowing How to Market Your Business: Marketing is critical for every form of business. A strong web and social media presence and understanding how to use them to drive traffic to your business are critical. In today’s digital world, a well-designed and easy to find website can be one of the most critical assets your company has. If you hesitate to invest in this form of marketing because of the cost, or from lack of understanding, your business has a significantly lower chance of surviving the first few years.
5. Do Not Become Complacent: This is an easy trap for new business owners to fall into. You have opened your doors, physically or online, established a customer base and revenue is coming in. Although you should feel proud of your accomplishment in making it this far, now is not the time to set back and relax. Make sure you are still on target with your business plan and update it if you need to. Monitor any ways that the market is changing and adjust your business strategy to change with it. Keep searching for ways to improve your service or products.
Now that you know why so many new businesses fail, let’s take a look at what elements help small business to grow and thrive:
1. Have Specific Goals: By specific, successful business owners know this means really specific. You can’t just say “I want to see x amount of revenue in this quarter.” Have a plan for how to do that. Do you need to increase your marketing budget? Hire new employees? Specific goals keep you from getting so bogged down in the day to day of running your business that you forget to plan for the future of your business.
2. Keep Your Expenses as Low as Possible: While there is truth in the old adage that you have to spend money to make money, make sure you are not spending more than you need to. Define the necessary expenses for the growth and well-being of your business and figure out what expenses are unnecessary. Look at even the minor details. Are you paying dues to a professional organization that you do not utilize at all? Are you investing in expensive bookkeeping software, but outsourcing all your accounting work to a company that has the same software at their disposal? If you do all of your business online, why spend money on an office? Virtually every business wastes some amount of money in unnecessary expenses. Take a hard look and shave off everything that isn’t directly impacting the bottom line of your business.
3. Avoid trying to do Too Much Too Soon: You want your business to be wildly successful. That’s terrific. You are energized and excited to finally be doing what you have dreamed of. The most successful entrepreneurs know that they have to bide their time before making risky moves. If you are seeing steady growth and success in selling your widgets, stick with that until you are the best widget provider possible. Only then is it time to consider expanding your product or service line. Trying to grow too fast, or do too much too soon, can leave you overextended. This may start to impact the quality of whatever products or service you founded your business on, and drive away loyal customers. Perfect the business you have before seeking to grow it into something more.