How can you avoid small business failure? Often, the reason new businesses fail has more to do with a lack of understanding than a lack of resources. When I coach new business owners, I always share with them one piece of advice: often, it’s more important to know what you’re bad at than to know what you’re good at.
The reason why? It’s often those blind spots that trip you up as you’re building your business.
Not sure what yours are? Here are six common traps — and how to successfully maneuver your way around them:
1. The PASSION PROBLEM
Why it Causes Business Failure:
It doesn’t matter if you’re a one-woman army, or if you’re building the next major multinational corporation… if your profit model has only gone so far as some scribbles on the back of a cocktail napkin (or any equivalent thereof) … time to pause.
Too often, entrepreneurs believe in their idea so much that they fall into the trap of thinking their passion and love is enough to make the business succeed.
It’s just not true.
Businesses need money (preferable LOTS) — e.g. a revenue model — to survive, grow and thrive, and so do you.
Tips for Success:
Figure out how you will make money. It sounds simple, but it’s not always.
- Are you going to bill by the hour or by project?
- Are you going to move a large quantity of lower priced items, OR
- Are you selling high-end items that will require specialized marketing?
If you’re manufacturing a product:
Calculate the cost of making the goods (this is called “cost of goods sold” in accounting speak), figure out how much you will sell it for, and then make sure there is enough left over to pay yourself and cover general business expenses and taxes.
It’s also important to be flexible and listen to your market.
Sometimes what you’re passionate about isn’t the same as what your customer wants. And sometimes your customers can clue you in to other business ideas.
For example, a skincare product company opened a beautiful little shop in NYC to sell their wares. Shortly after opening the owner overheard customers asking for facials and spa services, which they didn’t offer at the time.
The owner listened, pivoted, and responded by giving their customers an entire menu of spa services using the brand’s exclusive products. Had the business plan dictate they only sell products, the business might have failed. Instead? That business now has multiple spas across the tri-state area.
2. You Love Money, But You Hate Dealing With it
Why it Causes Business Failure:
Entrepreneurs love making money, yet they often hate accounting.
But, as a business owner, you can’t run away from money issues or general finances on a regular basis.
Avoiding your finances can lead to various problems:
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- Missing tax deadlines
- Over/underpaying taxes (resulting in nasty penalties and interest!)
- Profit holes
- General stress and anxiety
- Lack of business growth
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Moreover, according to one study, “non-employee businesses” (the academic term for #solopreneur) only earn an average of $46,978 annually, which is hardly a fortune.
If you’re leaving your corporate job to pursue the life of an entrepreneur, make sure you (and perhaps your family) can weather major financial ups and downs.
Tips for Success:
Getting most entrepreneurs excited about spreadsheets, accounting software and systems and setting financial goals is about as easy as getting toddlers excited to eat spinach.
But if you’re serious about your business and it’s financial future, you’ll quickly realize that by not mastering this skillset you are putting your business, and your dream, at risk.
There are many ways you can learn these skills online — from webinars to workshops. Your local community college may also offer entrepreneurship and accounting classes.
You can also check out my financial basics course, Chief Wealth Officer, to dive in and get ahead of the learning curve.
At a minimum, you need to learn basic financial vocabulary and how to read the financial-success trifecta of reports: the profit and loss, balance sheet and cash flow statement.
Also, it’s crucial you pow wow with your accountant early on to learn how to plan for, and pay, estimated taxes. A large tax bill, or poor tax planning, can be a financial sucker punch to your business.
3. You take on too much, and then fail at it all
Why it Causes Business Failure:
We all know how it feels when our expectations aren’t met, or we fail at something big — it stinks and it often leads to inaction and depression.
Not only that, science indicates our brains like small, measurable, achievable goals. Every time we “score” a point, we get a little shot of dopamine — the brain chemical responsible for things like creativity and decision making.
Setting realistic goals, and attaining them consistently, is crucial to slowly growing your business and fostering your professional self-esteem.
Tips for Success:
Set yourself up for success by creating strong habits, rituals and systems in your business right from the beginning. In the past I have:
- Practiced Money Mondays, which is when I get all of my money work done, look at my sales reports, invoice clients, and handle all my finances.
- I have also practiced the “hour of power” on Sundays where I write out my major “to-dos” that must get accomplished.
- Now my morning ritual spans about four hours (yes, four, including exercise which is CRUCIAL to any high achiever).
Find great strategies to help you feel organized and start each week off with clear objectives.
Set realistic, specific, and measurable goals for yourself, and then reverse engineer how you are going to get there.
If you want 10 new clients in the next year, which networking events are you attending? How are you marketing yourself? Do you have a contract in place? What are your customer service policies in order to retain clients? Where do you see yourself at the end of this quarter? This year? Five years?
Map it out, and then check where you are on your course often so you can make adjustments as needed. A fancy term for this is KPI – Key Performance Indicators.
4. Location Isn’t Everything – It’s Actually About Your Timing (or Product)
Why it Causes Business Failure:
If you want to start a business, the first thing you are taught is “find a need and then fill it.” And while this is of course true, it’s critical for entrepreneurs to remember you are not your market.
It can be challenging to objectively analyze your market and your potential customers when you are completely in love with your idea (i.e.e when passion is a problem). New business owners believe in their dream, and they should, but if you are serious about your success you better get on the market research bandwagon.
Tips for Success
Get moving if you know your idea will work!
If you’re launching a product, talk to potential customers and listen to them carefully.
Make sure your brilliant idea is a match for their needs. If you hear only mediocre interest, but they express the desire for a different solution, be flexible and respond to the market’s needs (remember the skincare line that morphed into a spa to meet customer desires).
If your initial market is responsive, expand outwards and gather realistic data for potential customers outside of your first wheelhouse of customers.
Keep in mind that, in order for your business to thrive, you need not only new customers, but repeat customers, or customers you can sell something to over and over again.
If your market data tells you that your idea is hot and can realistically make you money, go for it! Chances are another business owner has thought of the idea too! So make sure you are moving quickly enough to bring your idea to market at the right time.
5. Your Address Isn’t Helping You
Why it Causes Business Failure:
Whether you are an entrepreneur or not, we have all heard the phrase “Location, location, location!”
Choosing the right spot is critical to the success of your business. If you are opening a retail store, you’re more likely to succeed in an area with heavy foot traffic, near businesses that your products compliment or are similar to in nature.
In the online world, having the right digital address can be just as crucial.
New brick-and-mortar businesses can make a lethal, first-time mistake by setting up shop in a more remote location in order to save on monthly rent expenses.
In the digital world, selecting a URL that is hyphenated, uses a lesser-known suffix like .co, .info, .org, when it’s a commercial business and not an organization, can cause the death knell to ring early for these ventures.
Tips for Success
If you are opening up a retail store, every time you say “location, location, location” you should follow it up with “research, research, research.”
Big box chains hire experts to analyze everything from consumer demographics and highway traffic patterns when selecting where to make their next huge investment. You should put on your sleuthing hat and do the same.
For brick + mortar businesses:
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- If you’ve had your eye on the “perfect place downtown” that seems to have a high turnover of tenants, be leery and ask questions of neighboring businesses and potential customers.
- Send out a survey to friends and family that live in the area to gauge interest and feedback from your potential customers.
- Hiring a quality, commercial real estate broker here might be a good investment, especially if they have worked in the area for a long time and can offer insider details and opinions on your business’s potential new home.
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For digital products and services:
There are wide and varying opinions on all things “strategy related” to URL and web addresses.
Before you launch your business baby into the digital universe, consider these guidelines:
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- You will likely do better with a .com than any other suffix on the market unless you’re a charity, in which case using .org is appropriate.
- The shorter the URL the better. Although as time passes, users are becoming accustomed to longer, and even hyphenated, URLs.
- Make sure that your web address at least includes some keywords connected to what you sell. For example, if you are a copywriter, using “copywriting,” “writer” or “wordsmith” will help your customers easily identify what you do.
- Before you lay down a large chunk of cash buying a “valuable” URL, make sure it’s as valuable as the seller portends. There are consultants out there who can provide you a URL’s actual valuation.
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6. You Don’t Delegate
Why it Causes Business Failure:
In order for your business to succeed you have to be brutally honest with yourself.
This means you need to take inventory of the skills you have and the ones you lack. It’s critical for your mental and business health to delegate the tasks that aren’t your strong suit.
Consider the Target Training International study on the skills needed to be a serial or successful entrepreneur. According to the study, TTI analyzed 23 professional skills using a validation assessment. Most adults have mastery of five or six skills but entrepreneurs racked up a whopping average of 14 out of the 23 skills listed. Some of those skills include leadership, goal orientation, persuasions, futuristic thinking, negotiation, decision making, flexibility, and creativity.
Tips for Success
The easiest way to see around a blind spot is to ask others to help you see it; ask employees, contractors, and clients how you can improve.
This isn’t an easy conversation to have, but it’s a necessary one. It may help to generate a short, anonymous survey if you are the type of person who gets prickly when criticized.
If this won’t work for you, look back over the last 1-3 years, and analyze your failures. They are also your biggest learning experiences!
If you find yourself with a high employee turnover rate, or unable to sustain long-term client and vendor relationships, it means you can’t sustain relationships. And relationships are EVERYTHING in business.
If you found yourself in an audit without accurate records, it may be time to delegate the tasks to a professional bookkeeper or accountant.
If you spent thousands of dollars on a failed online marketing campaign that you designed, managed, and implemented, outsourcing it to a marketing specialist could be a great investment.
There Isn’t One Way to Ensure Small Biz Success
It’s very hard to determine the exact reasons why certain entrepreneurs and businesses succeed and others fail. While there are some common reasons, research suggests that failure is usually the result of a confluence of issues.
Over and over research indicates that a poor profit model, lack of cash flow management and access to capital are the major causes of a business failure — whatever the reasons behind it.
As a responsible business owner, it’s in your best interest to keep a close eye on making sure your business is in the black, or has a solid plan in place to get there.
Doing a core competency check-in on what skills you bring to the table, and where your business needs to improve, is also an excellent way to shore up any potential profit pitfalls.
If you are invested in your business’s success, you know that your future depends on your ability to make (and keep) a profit. The only way to measure this is through good bookkeeping (Profit is one of those Key Performance Indicators we talked about).
Not sure if you are profitable, or are craving more financial control? Get in touch. We offer awesome VIB – Very Important Bookkeeping Days as one-day financial intensives or ongoing bookkeeping services to the business owner who is ready to delegate.
