A husband and wife both enjoyed the same hobbies and started a small business based on what they loved doing. They were experts at what they did, knew how to market their products and enjoyed excellent customer relationships. But they failed at business planning, not calculating the amount of tax that was due and so had to close the business within a year.
A grim reminder of small business obituaries. Stories about start-up and small business failures abound. Over the past three years we’ve all seen many businesses go to the wall. Some surveys estimate that more than 50% of small businesses fail in the first year and 95% fail within the first five years.
Before you commercialise your brilliant idea check out some of the biggest mistakes below that businesses typically make. The mistakes are based on research by credit organisations as well as small business surveys that look into the main reasons why businesses go belly up.
The majority of businesses cite economic reasons for their failure. But at the same time up to 90% of all business failures can be traced to management mistakes.
Here is a list of 10 of the biggest mistakes that businesses make that often lead to their demise unless pre-emptive action is taken.
1 Lack of adequate cash flow. If a start-up or small business can’t fund its day-to-day expenses, it will land in serious trouble. Cash flow is like the blood that courses the body. When there is none the business dies. Unless, of course, it can be resuscitated through an injection of funds.
2 Lack of experience. Experience, accurate knowledge and expertise are required in any field. You’ve got to be an expert in your chosen niche and products and services if you want to be successful in today’s ultra-competitive markets. Your distinctive competencies must match the needs of the market in which you are operating.
3 Being wedded to your idea. This is also known as “drinking your own Kool-Aid”. Here entrepreneurs fall in love with their product. This emotional involvement leads to myopic vision which blinds them to weaknesses and threats. The cure: make sure that you listen to your customers, get market feedback and counter any shortcomings in your product or service.
4 Not establishing market demand. Over-enthusiastic entrepreneurs believe their products will win over the market because of their superior quality and design. Unfortunately, without testing your product and obtaining feedback from prospects and potential buyers, you’ll be shooting in the dark. A small test market in a selected geographical area will tell you a lot – more valuable feedback than from flattering family members and friends.
5 Underestimating the energy it takes to build your product. Without adequate and accurate estimation of the resources you will need and the time and effort that it will take to develop your product, you will need to be careful to not let your enthusiasm die.
6 Overestimating the market opportunity. Not only do you need to know the size of your market and whether it is growing, you need to also establish the size and growth of the market opportunity that you have identified within your chosen niche market.
7 Ignoring the competition. Many markets are highly contested. Customers want the best deal they can find. You need to make sure that you keep a close watch on your competitor’s product and services to ensure that your product match their, or better still, are better than theirs and are properly positioned.
8 Inadequate financing. It’s not so much finding or obtaining sources of finance that is the problem for start-ups and small businesses but lack of planning for funding. There are several sources of funding that small businesses can draw on including self-financing, in cash and equity loans, assets, loans from friends or relatives, personal savings, angel investors and banks. Just be careful that the more finance required, the more equity that you usually would need to give away if you are considering any sort of equity financing.
9 Hiring the wrong people. Many entrepreneurs have great energy and passion for their area of expertise. But unless their staff share the same enthusiasm, and are trained in all necessary parts of the business or in their jobs, wrong hiring can be a big mistake, up to 20% of the biggest mistakes businesses make, according to a small business survey. Selecting and hiring employees, particularly with stringent labour laws, means that you need as a small business owner to give this your utmost attention or seek support from a specialised placement firm.
10 Not knowing how to market and sell your product. Many business owners are experts in their field, they love their products and think that the whole world will beat a path to their door. Not so. You need to be aware of the best ways to market your product or service and give it special attention. Common marketing techniques for small businesses include word-of-mouth, networking, customer referrals, Yellow Pages directories, print, e-mail marketing, the Internet and social media such as Facebook, Twitter and Pinterest for relationship building. Although using social media will not bring about an immediate sale it is a very cost-effective way for small businesses to reach targeted audiences with specific messages to influence initial purchasing decisions.
I must confess that in my own five or six start-ups I have made mistakes. One was for a distribution business where I miscalculated the need for competent sales people as well as positioning the business. Another business, which involved a new condiment product, included much product development but I did not do the necessary testing and under calculated the important role of wholesale and retail distribution channels.
Knowing these mistakes is at least a step in the right direction to avoid failure. It’s not something that business people like talking about but given the number of businesses that do go bankrupt it is worth looking into.
A small start-up or small business needs to take a look at the resources it has and the external market to evaluate not only opportunities but weaknesses and threats. Where small business owners don’t possess the expertise in areas such as marketing, financial systems and tax law requirements, they need to consult with professionals for the necessary advice.
Taking action at an early stage helps reduce the risk of start-up and small business failure and will help to set small businesses on a growth trajectory.