Taking an idea and turning it into a long-term success often means making smart business decisions as your company grows. According to the U.S. Bureau of Labor Statistics, about 20 percent of small businesses fail in their first year, and 50 percent of small businesses fail in their fifth year.
How can an entrepreneur effectively launch a small business, keep it running efficiently, and foster long-term growth? We break down each stage and discuss some common mistakes business owners could fall into.
Stage I: Mistakes made by startups
1. Expecting immediate profits. When launching a startup, owners need to realize that they may not see profits for several years. For this reason, many entrepreneurs decide to work full time while building their company — about 59 percent, according to a 2018 Paychex survey. While sales may be solid, the sheer volume and scale of startup costs means that entrepreneurs may need to be ready for some lean years during the early stages of any enterprise’s lifespan.
While there are serious financial considerations to take into account during these first few years, entrepreneurs need to also mentally prepare themselves for this period. Some business leaders second-guess their decision to launch when times are difficult early on. However, by staying productive and creating a detailed business plan, entrepreneurs can stay focused on building up their business, even when revenue streams are modest.
2. Incorrectly budgeting startup costs. From office furniture to fees for establishing a business, there are certain costs that many small businesses simply overlook. One of the top pitfalls of starting a new business is failing to account for just how much it will cost and making sure the funds are available to cover initial expenses. According to a Paychex survey of 1,000 individuals considering opening their own business, about 59 percent of respondents expected to self-fund their new company. Before risking your personal savings on a new venture, it’s important to understand all the costs related to opening and operating a company. Often, owners will fail to include lesser-known costs in their budgets, which can have a negative impact on the bottom line. More importantly, it can create serious cash flow problems that may threaten a business’s existence.
3. Locking yourself into an unfavorable lease agreement. The space where you conduct your business can be of vital importance. It can help you and your team be more productive, help visiting clients feel more confident in your firm’s stability, or give you access to vital retail traffic.
The challenge is that this is an ongoing fixed cost that is completely independent of your revenues. It is a legal commitment that can hamstring your ability to actively manage your cash flow when times are tough. You are at the mercy of the lease.
Rather than commit to a long-term lease agreement, many small business owners are now using incubator spaces, pop-up facilities, and other shared and subsidized office arrangements. These provide solid, low-cost alternatives to traditional office spaces, and offer the flexibility to scale up and down in line with real-time budgets.
4. Failing to create a solid marketing plan. A marketing plan is a roadmap to the objective of getting the word out about your products or services and making a compelling case for prospective customers to purchase your offering. A solid marketing plan should include:
-A series of steps to promote your business, with accompanying deadlines for completion;
-A breakdown of individual initiatives or campaigns, with projected ROI and anticipated long-range growth; and
-A back-up strategy in case your key promotions fall through.
Putting together a marketing plan can help you gain a better understanding of your average customer’s value and lifetime, the costs involved in new customer acquisition, the difference between a desirable customer and those not worth your effort, and the intricacies of all the marketing channels available to you. Such information is virtually priceless in assessing your status in the marketplace.
5. Launching without the right intellectual property protections. Imagine you’ve got a great product design. You’ve put together the necessary inventory and have partnered with the right distribution channels. The business is just starting to roll. Then the same product appears from someone else — plus it’s cheaper and more widely available. Your business has literally been stolen out from under you.
You can prevent this scenario with the right kind of intellectual property protection. Different types of patents, including utility patents for new applications of existing products, are available to help protect small business owners and their investments.
It is important that you consult with an attorney to ensure the correct safeguards are in place — including patents, right-to-use paperwork, licensing agreements, and other forms of intellectual property protection — before you put in too much of your hard-won cash.
6. Failing to pick business partners wisely. Not every entrepreneur has expertise in accounting, taxes, marketing, and finance, but these are vital skills in the business world. If you need to fill in gaps, you may choose to partner with someone whose expertise can help provide balance and create a well-rounded management team. However, making poor team choices or putting trust in the wrong people was named as one of the top small-business pitfalls by a panel of 31 entrepreneurs interviewed by Paychex. When it comes to business partners, employers, and external business relationships, it’s important to build relationships and make sure you’re engaging the right person for the job.
Although finding the best business partners can pose a challenge, failing to ask for help when needed was another common small business mistake cited by the entrepreneurs mentioned above. Knowing when to bring in an expert can help you run your business efficiently and avoid the need for you to learn everything from day one. For example, although a professional accountant may not need to assist with early stage day-to-day accounting, a CPA can provide high level expertise to startups. Many CPA firms will gladly sit down with entrepreneurs and share small-business tips and other guidance on current accounting issues. Accountants and lawyers can also advise companies on selecting a structure and discuss potential tax-planning issues. Future accounting mistakes can be avoided by working with a professional accountant to properly set up a new business.
Article written and published by Paychex, Ameris Bank’s partner for simple, virtual, cost-effective payroll and HR solutions.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.