7 common mistakes when starting a new business
Updated: Oct 15, 2019
You will often hear statistics that "most small businesses fail". According to data from the US Bureau of Labor Statistics: about 20% of small businesses fail in their first year, and about 50% fail by their fifth year. These statistics may be intimidating for a new entrepreneur, however it should be said that most businesses make common mistakes that should NOT happen. Avoiding these seven mistakes will greatly increase the likelihood of survival!
Mistake # 1: Not Enough Cash
Also known as “money,” capital is what partners, shareholders or business members contribute in exchange for ownership in the business. Some businesses are capital intensive — as in a dental practice — while others are capital efficient — as in a copy editing company — but in every business, lack of money is the number one cause of failure. Typically the startup capital is only the start. The heaviest cost burdens will likely be the recurring monthly costs like rent, salary, and employee health insurance that cause losses during your start up phase and slow seasonal periods. See our post "Are you ready to start your own business, do you have enough cash?" for a fuller discussion.
Mistake # 2: Taking the wrong shortcuts
New businesses typically lack cash and founders will take short cuts with spending ostensibly in the interest of the business surviving. Logical, but be careful, shortcuts can backfire or create irreversible problems down the road. Not incorporating your business could save some time and money however will this affect the image or reputation of your business? Larger client prospects may not want to engage with a client that is not legitimate. Writing your own contracts without consulting a lawyer? Yes you'll save a few hundred dollars, but what if you get sued because the contract did not protect you from liability. "I'll do that later" may never happen. See our article "Taking the wrong shortcuts..." for more on this.
Every entrepreneur dreams big dreams — and thank goodness — but sometimes things go awry. In order to be successful, a new business needs to remain flexible in its processes and develop easy-to-understand contingency plans in case the idea isn’t as big of a hit as expected. A line of credit from your bank, for example, need never be used but can be critical when you hit a bump in the road. Your budget needs to include a plan for if sales are less than you expect, a key person suddenly quits, or a client doesn't pay a large invoice.
More more on this, see our article "Lack of planning, or "only planning for success" are big problems in startups" for further insights.
Mistake # 4: Weak Sales Focus or Execution
Having a great product is not enough. You as the owner (or your lead Sales Manager) have to make sales from day one and set the example for the rest of your team. This takes getting to work EVERY DAY and making sales the top priority. Do not let sales activity come after the other tasks of the day, its an "A" task that needs to be your first priority each and every day.
Mistake # 5: Choosing the wrong business partners
Family, friends and money do not often mix well, and often is the cause of business failure. Sure you would fire an under performing salesperson, but what if that person is your best friend? Or worse, your wife! You might say these are the people you "trust" but the downsides could far outweigh the advantages. Businesses need to be run with the primary goal that the business survives and prospers, so make sure to separate personal and business relationships as much as possible. Think it through carefully, weigh the pros and cons, do you even need a partner ?
Mistake # 6: Trying to do it all by yourself - not managing stress!
Having an accountant, banker and attorney with whom you’re on a first-name basis ensures you will build a strong foundation for your business and won’t make mistakes that will cost you more to fix down the line. Build a team of people that can support you, no one has the time or skill set to do everything on their own and trying to do so will cause incredible levels of stress. See our post "Stress management for business owners".
Mistake # 7: Lack of Commitment, you keep your day job going, you simply give up.
Finally and perhaps most importantly to remember, businesses fail under two main situations. The business runs out of cash, or the owner gives up, that's it! Many successful businesses survived and then prospered simply because the founder refused to give up. Keep reminding yourself why you started the business, what your goals are, and keep at it. If you don't quit, its not done, It's not easy but it's worth it. Keep your cash burn rate low and work hard, be humble.
Finally, with regard to a question that often comes up, "...should I keep my day job until the business is profitable?", lets be clear. Keeping your day job can be a disaster, it means two things. Firstly, by doing so, you are not fully committed psychologically that the business will be successful, and secondly, you are by definition not committing 100% of your time to the new business. These are obstacles you've put in front of yourself from the beginning.
For more advice, support and information on ways we can help, please contact us - Curtis Mackenzie - MD New Frame KK www.newframe.jp