Starting a small business is a handful. The number of hours that need to be put in is high, and the reward is low at the beginning.
In the U.S., about 30% of small businesses fail within their first two years, and only half survive the 5-year mark.
Many of those businesses fail because of similar mistakes, so let’s talk about how to avoid them.
Small Business Basics
There are a couple of things that are important to understand for any business.
Yes, every business is different, but a few aspects will remain the same. Here is a quick rundown of what you need to know before we get into the mistakes.
Revenue vs. Profit
This may sound mundane, but it is something a lot of small business owners don’t fully understand. Revenue is the amount of money that is flowing into the business. Profit is revenue minus expenses.
If you spend $50 to make the product you are selling (including advertising, materials, and any labor costs) and sell the product for $100, you will make a $50, or 100%, profit.
How to Pay Yourself
There are two common ways that business owners pay themselves – salary or draw.
With a salary, you pay yourself a direct amount of money with a pay stub and incur income taxes that you pay each period, instead of all at the end of the year. However, you will still have to pay some self-employed taxes out of the company’s money.
With a draw, which is the most popular method, you take money out of the company for personal use as you go. You will then only have to pay self-employed taxes at the end of the year.
Either option is great; it only depends on how you want to do it. You’re the boss!
The 15 Most Common Mistakes When Starting a Small Business
While businesses fail for many reasons, almost all of them link back to running out of money. So, let’s talk about the most common mistakes that lead a business to fail, and how to avoid them.
1. Having No Income
Okay, so when a business first starts, revenue is bound to be low. That is completely okay. However, if you are not making any money at all, an extra job on the side won’t hurt.
That’s not only for the business, but you need to pay the bills. Maintaining your life is more important than the business, so make sure that you have some form of steady income until the business pays off.
Business loans can go a long way, so see if that would be right for you to allow for some wiggle room. Check out some tips on qualifying if you haven’t opened one already.
2. Poor Pricing
This is one of the most common issues. Proper pricing is important for sales and profit. Many people starting businesses fall into two separate mistakes in this category.
Pricing Too Low
It is common to want to undercut pricing to stay competitive, but pricing too low can kill your business.
With any business, you need to calculate the expenses, hours of work, and ideal profit margin to find the proper pricing. If it seems unfair to the customer, remind yourself that it is the cost of business.
Pricing Too High
On the other side, pricing too high will lead to fewer sales. Figure out an appropriate amount to charge the customer that won’t hurt your business, and be sure to include a fair hourly wage for yourself.
Doing everything to the best of your abilities is a great way to run a business. However, achieving perfection is not always possible. Figure out the situations where good is acceptable, as well as when it isn’t.
Striving for perfection with every minor detail can be great, but not if it is wasting your time that could be used for more important tasks.
4. Hiring Too Early
Employees are excellent for growing your business, but they come with time. If you hire employees too early without enough revenue, you risk going bankrupt.
Employees will likely be your biggest expense, down the line. Bring them in only when the business is stable enough to support the cost.
5. Hiring the Wrong People
Once you are at the point of being able to hire staff, make sure they fit the company’s needs.
Otherwise, this will implode your business. Your team is often the face of your company for many customers, and having the wrong team will hurt your business.
Make sure you do background checks, reference checks, and train them well. The culture among the team is also critical, so check out some ways to create exceptional team culture.
Another tip: Hiring friends is not always a good idea, as friends often think they will get away with more.
6. Avoiding Marketing Costs
This is one of those costs that you cannot get away without. Marketing is critical for every business, whether it’s online, word-of-mouth, or through flyers.
Nobody will pay for products or services from a company they’ve never heard of, so use every tool you can afford to your advantage.
Marketing can also be fun! Hosting events in your area and getting people on board is a great way to reach out to your community and gain some new clients.
7. Not Having a Business Plan
A clear business plan is the most important thing to have before launching your business.
Not only is the business plan the foundation for your company, but it is the set of guidelines that should be followed daily.
Having a plan for each and every day is also important. Apps like Nirvana can help you keep your schedule organized and keep your plans going strong.
8. Doing What You Love
Unfortunately, doing what you love, instead of what you are best at doing, is a bad business model.
For example, if you absolutely love rock climbing, but you have no idea how to manage a rock-climbing gym, then it isn’t the business endeavor for you.
Keep your hobbies separate from the business if they will not succeed. Look at your background, find your own strengths and weaknesses, and do what you do best.
9. Not Doing Enough Research
Market research is critical to performance. It is how you gauge what the target clientele are looking for, so you can adapt to their needs. Some people simply avoid it because they don’t understand the process.
Luckily, we live in the age of the internet. Check out some of the best online resources for marketing research.
10. Ignoring the Competition
Think about it. Companies like Lyft couldn’t have the business they have if they didn’t pay attention to what Uber was doing.
Watch and learn from your competition. From pricing to marketing strategies, there is always something to learn and adapt to in the business world.
Keep track of what you can implement to improve your sales and stay competitive.
11. Taking Everything on Yourself
Remember that you can’t always do everything yourself. If you know your strengths and weaknesses, delegating some responsibilities that could be more properly handled is a good idea.
If you have a team, find out their strengths, and see if they can help.
12. Not Thinking About Funds
Keeping track of finances is one of the most important aspects of running a business and should be done regularly.
Any small business owner should be keeping receipts, watching their credit, and watching the company funds like a hawk.
Running out of money is the number one reason businesses fail, so be very diligent about prioritizing spending and controlling revenue.
Even if you are not at risk of running out of funding, keeping track of everything will help you at tax time. Be sure that you are writing off every business expense you can!
13. Not Utilizing the Internet
If you had a way to reach everybody that you could ever want to pay for your product or service, why would you choose not to use it? There are so many resources the web has to offer.
If you have a few hundred friends on Facebook and post about your company, odds are that somebody will want to do business with you.
If they don’t, ask a few friends to share your post. Social media has the ability to spread the word like wildfire. Even if it doesn’t get you any business at all, it was free.
That brings us to the next point, pay-per-click ads (PPC) are great for startup businesses. There are no upfront costs, and you can spread the word to your target audience through social media platforms and search engines.
PPC ads are exactly what they sound like, and platforms like Facebook and Google use algorithms to ensure that your ads reach the proper potential clients.
It should go without saying that not having a company website is a real drag on your business. There are plenty of online resources you can use to build a website, so you should get started on that today if one hasn’t been launched already.
14. Not Staying Committed
Unfortunately, this is a problem for many entrepreneurs. If you start something, stick with it. Whether it is a simple task or the business as a whole.
When you realize that you are the boss, it is tempting to take some extra days or hours off of work. The best advice is to pick a schedule for yourself and stick to it.
You are the boss, but it is up to you if you will be a good one. Try to think of the managers you’ve had in the past. Think of the qualities you liked, and the ones you didn’t.
Even if you are the only one in the company, you need to be the type of boss you’ve always wanted.
15. Not Controlling Spending
We talked about overpricing and underpricing, but the same logic applies to company spending.
Overspending and underspending are both potential problems in startups. This is managed by simply knowing what needs to be purchased, and what can be put off.
Marketing, supplies, and labor will add up quickly. Be sure that you are not overspending on supplies, but make sure you have everything you need.
Also, don’t be afraid to negotiate prices. If you are having problems with paying upfront, find out if you can push the pay date until after your sale is complete.
How To Avoid These Mistakes
With all of those mistakes listed, is there a simple solution to avoid them? Luckily, there is.
The majority of the mistakes listed above boil down to rushing. Having patience is critical when starting a small business. If you move too fast, you risk losing all of your capital before creating any revenue.
On the flip side, if you aren’t paying attention to the competition, revenue, capital, and schedules, you are asking for a disaster.
The rest of the mistakes we listed can be solved by prioritizing. Know what is a pressing matter and what can be put off, both for your time and money.
Take the extra time out of your day to plan ahead, and these mistakes could be easily avoided. Also, try to keep a long-term mindset. Thinking in the short-term won’t get you very far, so be sure to think about the bigger picture of your business.
With all of the challenges of starting a small business, it is important to learn from other people’s mistakes, so you don’t go down the same road.
Simply prioritize your time, spending, and resources. Also, be patient. The rewards will come with time and hard work.
Keep up the hard work, and find out how to build brand recognition for your startup.
For performance-based business consulting, contact The Business Turnaround Group.