Ahhhhh, the entrepreneurial dream! The laptop lifestyle. The life of freedom and luxuries. At least that’s what all the ads on the internet tell us.
Anybody can make multi six figures by following their passion but in reality, only about 33% of prospective business owners, according to the Small Business Administration, crash and burn within their first two years. There’s no magic-bullet, ninja hack to ensure a successful business. If you don’t want to be part of that 33%, you should be aware of the common pitfalls causing small businesses to fail.
1. Poor cash flow.
Uneven, unstable, or nonexistent cash flow is the #1 killer of small businesses.
- Bank account balance doesn’t match your profit and loss statement
- You show revenue of xx, xxx for the month but you don’t have enough money to put gas in your car
- You freak out about your tax bill because you don’t have the money to pay it
If you are a new business owner, you are more susceptible to cash flow problems because you are still working to build your customer base and create your tribe of raving fans. While you’re building your platform, you still have to keep the business open which means an onslaught of new expenses. Depending on your business, the impact can be severe (particularly for brick-and-mortar businesses that must pay rent). Like, need to find an alternate means of funding the business or shut it down severe.
If you offer payment plans, work on a per project/job basis, or offer services requiring a deposit, you are more likely to run into cash-flow problems. The bills don’t stop when your customers are slow to pay.
Before trying to predict your income and set a budget, sit down with an accountant – like me – to forecast your expenses. It’s important to know how much savings you should have on hand and how much capital to seek.
Planning is key!
2. Lack of managerial experience.
Say that you have decided to open a specialty bake shop because you’re an incredibly talented pastry chef. You may know how to pipe a macaron better than the old French masters, but that doesn’t mean you know how to run a bake shop.
Or… let’s say you are were a stand-out accountant in one of the Big 4 accounting companies and now you are ready to go out on your own. You know numbers and how to keep an immaculate set of books, but that doesn’t you know how to run an accounting business.
Many talented individuals are fantastic at the main service or product their business offers but lack the business insight they need to make it succeed. Ultimately, they own their job instead of being a business owner.
An MBA is not needed to run a business. Taking business courses, hiring a proven (has actually owned a business and been in business before) business coach, finding a mentor, and networking with peers is invaluable. Ask questions and lots of them. Ask people about their experiences in business and what lessons they learned. Basically, don’t put yourself on a business island. No one knows everything. It takes a village to build a business that lasts. Find your village.
3. Not providing what the market wants.
Your product or service must solve a problem your customer has. If they don’t see you as the solution, it doesn’t matter how passionate you are about your product or service, your business won’t be realistic. There’s a reason entrepreneurship is a dream for some people; often, it is not realistic because it does not have a market. If you live in a small town and want to open a formal dress shop, you should ask, “Do the people in this town have the means and reasons to buy, or would a big city have a better market?”
Whether businesses target local or general markets, the inability to build a customer base often leads to failure, despite the owner’s’ love. Before you invest time or money into a new venture. do some market research. See what your customers are saying on Amazon products or books, search Quora, search Facebook, poll your audience, find your audience and ask them if your product or service solves their problem. Let your customers drive your offerings. Yes, research takes time and sometimes money, but it can prevent a major financial and/or time waste or reveal a major opportunity in a different place or another segment.
4. Not keeping up with the pace of growth.
Have you ever heard of “the law of diminishing returns”? It refers to the inability to keep up with growth—both forecasted and unexpected. This problem causes a lot of business owners to crash and burn. When a business has been in famine mode for years because of cash-flow issues but suddenly begins to take off, it can be difficult for its owner to change his or her attitudes about money. Think Groupon a few years ago. Think about ClickFunnels now. We want the customers but can we handle the influx?
Growth = Hiring and outsourcing!
You hire to keep up with demand. The owner can’t and shouldn’t do it all. As a business owner, you need to know and almost predict when it’s time to start outsourcing. Todd Herman teaches in his 90-Day Year program that a business owner should not spend time and energy on low-level tasks that can be outsourced to free up your time to work on high-level business building tasks. If this doesn’t happen, growth will be stunted. Invest in people, systems, and equipment. Don’t fall victim to the law of diminishing returns.
5. Not Learning From Failure
Even the wealthiest business owners in the world have had failures, whether they are projects or entire companies. They got to where they are by failing forward. I’m sure you’ve heard the success stories of Michael Jordan, Oprah, Steve Jobs, and everyone else who failed forward. Make the most of your mistakes by analyzing what happened and what you could’ve done better.
Look around your industry at other people’s failures. Let their lessons be your lesson. You don’t have to learn a lesson by going through everything. Sometimes it’s enough to learn from others. Be a student of your industry.
Want to beat the odds?
- Keep a handle on your income and expenses. You need a great accountant – like me. Also, take an accounting course to understand your numbers. Your accountant knowing your numbers does you no good. You must know and understand them at a basic level.
- Learn how to run a business. Make the mindset shift from employee to employer. Nail down what you want to be known for and provide that experience to your customers. Details matter.
- Solve your customer’s problem. Know their wants, likes, pains, and dreams. Don’t try to talk to everyone. When you talk to everyone you talk to no one. Don’t let your offerings fall on deaf ears.
- Plan for growth from the beginning. Invest in people and systems. It may not happen immediately or when you expect it too but be prepared when it does happen.
- Don’t fear failure. It’s what helps you grow.
Be prepared for the intricacies of running a business and you won’t be among the 33% that fail in the first 2 years.
Ready? Let’s grow!