Avoid Common Start-Up Pitfalls

As a current banker and former business coach, I have seen hundreds of businesses fail resulting in much heartache to the founding owner, the lost personal savings and battered credit ratings. According to several sources, including the SBA, the mortality rate for small businesses is quite high, especially in their formative years. Somewhere between 70 to 80 percent of all businesses will close their doors within their first five years, and a staggering 15 to 20 percent will fail in their first year!

The following are the 10 most common reasons new businesses fail, based on my personal observations. Thus, if today’s vetrepreneur can avoid the following traps, he or she stands a greater chance of remaining in business for a long period of time.

Reasons are listed in descending order of importance:

1.  Relying on One, Two or Three Major Customers 

Large concentrations in your customer base renders your business vulnerable. Diversifying helps spread your operating risk.

2. Not Putting in Enough Hours 

Sorry to say, but you must put in at least 50 to 60 hours a week, especially if you are a start-up company. During the first two years, “nurturing your business” is critical. Cutting corners or slacking off will result in a weak foundation.

3. Selecting the Wrong Location 

Visibility, convenient access for customers, suppliers, employees and a favorable lease or mortgage are very important success factors.

4. Excessive Employee Turnover 

You must create a working environment that will attract productive employees and motivate them to stay. You may have a brilliant business model, but you cannot implement it all by yourself.

5. Poor Service or Shoddy Products 

You cannot give customers reasons not to reorder or come back. Happy customers refer other customers. Establishing goodwill early is critical.

6. Expanding Too Fast 

Rapid growth requires a tremendous amount of cash to finance and also forces you, as the CEO, to stretch the limits of your management abilities, which may or may not be possible.

7.  Starting the Business Without Enough Capital

Being undercapitalized from the get go will hurt your chances of exploiting new customer opportunities as they arise.  Strive to estimate your total start-up costs as accurately as possible and then endeavor to raise that amount of capital.

8. Getting Into the “Wrong Business” 

Wrong is defined as a business that you have little or no experience in or knowledge of.

9. Poor Cash Flow or Money Management 

Poor skills in this area will stop your business dead in its tracks. You must become proficient in managing your money!  Learn how to budget, borrow money, manage cash flow and detect wasteful uses of cash. Set up management information systems to help you do this.

10.  No Written Strategic Plans

To meet your business goals, you must have a well thought out business plan, complete with marketing strategies, management and organizational plans and financial projections. Make sure you refer to your business plan and update it at least annually based on changes you see within your industry, competitors, customers and employees. The majority of the value derived from writing a business plan is not the finished documents but rather the learning derived from thinking it through.

If you can’t avoid them all, try and avoid as many as you can!  Good luck!

Written by Eugene E. Valdez