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10 Reasons Most Small Businesses Fail and How You Can Buck the Trend

10 Reasons Most Small Businesses Fail and How You Can Buck the Trend

It is estimated that as much as 33% of US small businesses will fail in the first two years. While this might seem disheartening at first glance, it’s probably not as bad as it seems considering the number of entrepreneurs who experience runaway success.

In this article, we’ll look at the ten most common reasons for small business failures, as well as how you can position your company to buck the trend.

1. Lack of Capital

Most entrepreneurs start out with a brilliant business idea. However, many companies are not equipped with enough capital to start or take the company to the next level. The sad truth is that without the right capital injection, many great ideas are doomed to wither away after a couple of months.

The key to solving this problem is to invest the time in determining the costs associated with starting and operating your business. Try not to overstate profits but instead, do the necessary research to make sure you have the working capital that is needed to sustain the business.

The next step is to secure your funding. Many entrepreneurs will turn to family and friends to avoid having to dilute their equity by getting a private investor. However, private loans are an excellent way to ensure continued funding for the business, especially in the start-up months.

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2. Cash Flow Problems

Having just an adequate amount of funds is inadequate. Not having sufficient finances at the right time is a major problem for many small businesses. Handling cash flow is essential to keeping the doors open. However, due to unforeseen events like late payments from clients, unexpected costs, or mistakes in forecasting, a huge chunk of small businesses frequently find themselves running into cash flow issues.

To overcome this common problem, you will need to put in the time to develop an in-depth cash flow forecast; this can be a time-consuming and intricate procedure, so utilizing technology to automate this process can be helpful. Additionally, it’s good to have a ‘cushion’, so if unexpected expenditures turn up, which they inevitably do, you’ll be able to cover them. Planning is the key to overcoming cash flow issues in a small business.

3. Issues with Delegation

Some entrepreneurs are so personally invested in their vision that they feel that they are the only ones who can do it right. Not only is this impossible in many cases, but it is also inefficient and causes burnout. A business owner who fails to train and delegate could face a serious problem if he is out sick or has an emergency.

Entrepreneurs must learn to invest in a team of staff members who can be trusted. The key is to train and then delegate. Effective delegating will leave the business owner to focus more on growing the business and identifying opportunities.

4. Ignoring the Competition

While business competition is healthy for the economy, they can be a threat to the small business owner. An entrepreneur who does not understand his rival may be setting up his business for failure. Often a company is not aware of the competition in their niche until it is too late.

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To maintain your competitive edge, make certain to do an analysis of the competitive landscape. Additionally, continuously monitoring your competitors will enable you to benchmark yourself versus them, learn from their errors, and most importantly not fall behind.

5. Inadequate Customer Demand

Many small businesses think that the product or service that they provide is the best and never consider whether there will be a market for the business.

It is important to conduct thorough marketing research and make sure that your prospective consumers desire what you’re offering. In a lot of cases, it may simply be a matter of tweaking your product or service, so it aligns with what your target audience wants.

6. Failure to Advertise

It doesn’t matter if you have the very best product on the market if your clients do not know about it. With the increase in internet marketing, small businesses who do not invest in digital means of promoting their products and services may be setting themselves up for failure.

Advertising is not always expensive. There are many low-cost options available to small business owners on a budget. There are also free alternatives available such as social media and email marketing. The key is to research and find out the combination of promotional products and platform that will be best for your business and your target audience.

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7. Business Idea Isn’t Profitable

Unprofitable ideas are often the result of a good initial business proposition, but soft financials. If the client acquisition costs are higher than the income that they generate, then the business model is either incomplete or just doesn’t make good sense.

The solution to this problem is planning and research. Before starting a business ensure you understand the cost of customer acquisition and how much you are willing to pay to maintain a profit. If your research reveals a high cost to get the product or service into the hands of the customer, consider ways in which you can cut cost or increase your income.

8. Not Going Digital

With a growing number of people spending time online, small companies cannot make the mistake of only focusing on the brick and mortar of the business. Many companies are now finding success in the virtual marketplace.

At the most basic level, if a small business wants to be successful, it must maintain a professional website. In the era of social media and digital marketing, a small business owner may find great opportunities to promote his products and services to clients all over the world.

9. Poor Leadership and Management

Poor leadership and management can be the demise of many small businesses. When individuals at the top who are in charge of coordinating everything, aren’t doing their jobs properly, the rest of the firm falls apart too.

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A successful business requires leaders and managers that can influence, motivate staff members, and make certain things are working smoothly. It is important to invest in your human resources with training.

10. Changes in the Marketplace

Sometimes small business failure has nothing to do with the day to day operations of the business, but external factors such as the economy or the presence of a brand-new disruptive technology that makes your business outdated.

Not all external factors are out of your control. Preparation, research, and planning can help a small business owner adjust to a changing marketplace.

Small business success is possible despite the daunting statistics. Being armed with information as to the pitfalls many entrepreneurs fall victim to is a good start to making your business successful.

Featured photo credit: rebrn.com via i.imgur.com

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Published on December 13, 2018

How to Start a Company from Scratch (A Step-By-Step Guide)

How to Start a Company from Scratch (A Step-By-Step Guide)

If you’ve ever thought about starting and running your own business, you’re not alone. Being your own boss, having flexibility with your schedule and keeping more of the financial rewards that come with business ownership are all good reasons to own your own company.

But as you might expect, it’s not all vacations and fat bank accounts. According to the SBA, 2/3 of businesses survive at least 2 years and approximately 50% survive 5 years.[1] So why is the failure rate so high? At least for the businesses that fail early on, lack of, or poor planning can be a major factor.

So how to start a company?

Starting a business from scratch doesn’t have to be hard or complicated, but it does take planning and work. Here are the first and most important 9 steps to take when your are starting a company from scratch.

1. Do an Honest Evaluation of Yourself

Do you work better in a structured or unstructured environment? Does a daily routine reduce your anxiety? What kinds of things are you good at? Does public speaking or making presentations make you nervous? Are you good at accounting and numbers? Can you handle the rejections you’re bound to get when selling or cold calling?

These are all important questions to ask yourself, in fact it’s a good idea to get other peoples opinion about their perception of you in each of these situations.

Whatever the answers you come up with for your evaluation, remember that’s all it is, an evaluation of where you are now. Think of it as a way to identify both your areas of strength and weaknesses.

You maybe good at public speaking which can help when raising money, but bad at accounting which just means that you’ll need to find some kind of help with that area of the business.

2. Evaluate Your Idea

If your business idea involves a new product or service (or even an enhancement to an existing product or service), it needs to be evaluated. This is technically called market research.

There are firms that specialize in doing market research for new products, but if you are on a tight budget, you can do this yourself.

First, if you can build a prototype for people to use, touch and look at that’s the best option. If a prototype is not possible or it’s a service business, then offer a highly descriptive presentation of the business plan complete with it’s unique benefits and how it’s different from the competition.

Then listen! Remember that this is not about others liking your product, this is not your baby that they are talking about. You want honest market research that gives you the best chance for a successful business. Take notes, when someone tells you that they didn’t like a feature or some aspect of your idea tell them ‘Thank you”.

After several rounds of market research with different groups of people, you should see patterns emerging about things that they both liked and didn’t like. Use this information to tweak your product or service and do another round of market research.

Keep in mind that you’ll never come up with a universally loved product, your job is to produce a product or service that appeals to the broadest range of your target market.

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3. Make a Business Plan

I know, I know this isn’t the “fun” part of starting your own business, but it is an very important step in creating a successful business!

Basically, you can think of a business plan as an outline or blueprint of your business. A good business plan should have the following elements:

  • Executive Summary – This should lay out the businesses product or service and the problem that it solves for the consumer.
  • Market Evaluation – This should talk about the market you are serving. Is it an expanding market, and how does your product better fulfill the consumers in that market.
  • Market Strategies – How are you going to penetrate the market and sell your product.
  • Operational Plan – How will the company run from day to day? Who are the key employees and what are their specific rolls. Do your key players have specific goals set for them in advance?

A final word on making a business plan: while lying is never acceptable especially when you are using the business plan to raise money, it is acceptable to “put your best foot forward”.

Playing up the positives while minimizing the negatives is almost expected in a business plan.

Besides, banks as well as professional investors will both do a more in-depth analysis before investing any money into your idea.

4. Decide on a Business Structure

You have many options here, and discussing them with your accountant or financial adviser is really the only way to know what’s right for you. But just to give you a quick rundown of the types of business entities and their pros and cons we will briefly go through them:

Sole Proprietorship

This is a common way for small businesses to get started.

The pros being:

Relatively low costs to set up (usually a business license and sales tax license).Owners normally do not have to set up a special bank account, they are allowed to use their personal one. Any income earned can be offset by other losses (check with your state!). You as the sole proprietor have complete control over all decision making. 

Finally, sole proprietorship’s are relative easy to dissolve.

The cons of using a sole proprietorship include:

You as the sole proprietor can be held personally responsible for the debts and liabilities of the company. Some benefits, such as health insurance premiums, are not directly deductible from business income.

If you need to raise money, you are not allowed to sell an equity stake in the company. In that same vein, hiring key people maybe more difficult because you cannot offer them an equity stake in the company.

Partnership

A partnership is formed when two or more people decide to start a business. Although there is no legal requirement for any documentation to form a partnership, it is my advice that you never enter into a partnership without having a partnership agreement. (Remember, spending $1500 now can save you $150,000 in legal fees later!).

The pros of a partnership include:

Being relatively easy and inexpensive to start. Hiring key employees can be easier as you are allowed to give equity ownership to as many partners as you want.

For tax purposes, partnerships are relative simple as any income is treated as “pass through” meaning that each partner pays tax on their individual portion of the partnerships income (As of this writing, always check with your tax adviser).

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As far as the cons go:

It can be difficult for some general partnerships to raise capitol. Because it is a partnership, the actions of one of the partners can obligate the entire organisation. All profits must be shared according to the partnership agreement regardless of the amount of work done by any single partner.

Some employee benefits may not be able to be deducted on income tax returns.

Limited Liability Company (LLC)

This is a very popular business entity for small to medium sized businesses. The reason for this is the cost of set up is not prohibitive and there is a separation between the owners and the company.

The pros of an LLC include:

Limited liability for the partners, unlike sole proprietorship’s and partnerships where the owners are held responsible for all of the companies debts and liabilities, an LLC provides some protection against certain debts and liabilities that are solely the companies.

Simple taxation, just like the sole proprietorship and partnerships, income is considered “pass through” and is only taxed once on an individual level.

There is no limit on the number of shareholders in an LLC. An LLC requires fewer fillings and administrative requirements than a corporation.

Corporation

A corporation is much more complex and expensive to set up. And a corporation is legally considered an independent entity that is separate from its owners.

The pros of a corporation include:

Complete separation between the owners and the company. Because the corporation is considered its own legal entity, owners can not be held personally responsible for any debts or liabilities of the company.

A corporation can raise capital much easier just by selling more shares in the company.

Cons of corporations include:

Much higher administrative costs than any other business entity. Corporations generally have a higher tax rate. Dividends are not tax deductible for corporations. Income paid in dividends is taxed twice, once by the corporation and again by the shareholder.

Again, this is just a short summary of the pros and cons, always check with your tax adviser about what will work best in your situation.

5. Address Finances

Again, not one of the “Sexier” parts of starting your business from scratch, but very important nonetheless.

So, you’ve done your business plan and an estimate of your start up funding should be included. It should include the amount of funding you’ll need to get you through your first full year of operations.

Now, how do you get that money?

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Self Funding

If possible, self funding is the easiest. You won’t have to go to banks and investors with hat in hand, or give up ownership or control of your company. But as we know, this is not a reality for most people. But don’t worry, there are still plenty of options available.

Friends and Family

They can be a good source of funding your business if they can see and understand your vision.

Remember that business plan? Pass them out to everyone you know. Then follow up, be prepared to tell them the total amount of money you expect to raise, the minimum investment you are looking for and what you will give in return for the investment.

For example, you give a friend your business plan and follow up with him/her a few days later. You can explain that you have secured funding for $80,000 of the $100,000 you need. You are selling a 2% share in the company for every $2,000 investment. How many shares would he like?

And when he/she tells you no, thank him/her and ask if he/she can think of anyone off the top of his head who might be interested? Tell him/her you really appreciate his/her time and if he/she does come across someone who might be interested to let you know.

Banks

These guys are happy to lend you money when you don’t need it, but all of the sudden they get stingy when you actually need a loan! This is where preparation comes in.

It’s a good idea to go over your business plan with an expert and maybe even have it rewritten by an expert before you approach either a bank or professional investor. Both will want to go over your business plan with a fine tooth comb, verifying all the numbers and data you provide.

You should also brush up on everything in the plan so that you can answer any questions they have with authority.

Crowdfunding

Finally, there is crowdfunding through sites like Kickstarter or GoFundMe. Crowdfunding helps to build interest, community spirit, and a customer base. It’s also an efficient way to raise funds. You can take a look at these tips to find out more:

6 Crowdfunding Tips To Get Your Project 100 Percent Funded

6. Register with the Government

As stated earlier, different types of business entities have different filling and administrative requirements. At the very least, you’ll probably need a business license as well as a state sales tax license.

Unless you are forming a corporation, there are many good resources on the web that will do everything for you at a minimal cost.

7. Assemble Your Team

Remember when we evaluated your strengths and weaknesses? Here is where we fill in the gaps!

Do you hate sales and cold calling? Great! There are people who love selling and wouldn’t want to do anything else.

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Bored to death with accounting? There are a ton of small accounting firms out there that will take care of that for you.

What about marketing? You can hire someone in-house or out-source that too.

Your job is to keep on top of all the different aspects of the business to make sure they are all running smoothly and getting the results you need. If not, it’s your job to figure out the problem and implement a solution.

Check out this guide and learn how to delegate effectively:

How to Delegate Work (the Definitive Guide for Successful Leaders)

8. Buy Insurance

No matter what kind of business you start, you need insurance! Yes, I know, no one likes to buy insurance, but it can literally be the difference between having a minor inconvenience and declaring bankruptcy.

We live in a very litigious time, even a minor slip and fall at your place of business could bankrupt you without insurance. If you need help finding a good agent, check with your local trade organizations or fellow business owners.

9. Start Branding Yourself

Has anyone ever ask you for a Kleenex or a QTip? We all know what they are because of branding, Kleenex is just a brand of tissue and QTip is just a brand of cotton swab. It doesn’t have to be as widely known as Kleenex or QTip, but you can make your brand a common name within your niche.

I once owned a manufacturing company that developed a product that was so popular that my competitors started co-opting my brand name for their products.

If you aren’t sure how to kickstart branding yourself, check out these ways:

5 Ways to Build your Personal Brand & Make More Money

The Bottom Line

Starting a business from scratch can be one of the most rewarding experiences a person can have.

But do you know what’s even more rewarding? Having a business that succeeds, is profitable and provides a good source of income for you, your employees and their family’s.

More Resources About Entrepreneurship

Featured photo credit: Tyler Franta via unsplash.com

Reference

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