At one time or another, virtually everyone thinks about starting a business. The allure of being your own boss can be strong, but it’s important to remember that launching a new business is risky: According to a recent SBA report, about 50% of all small businesses will fail within just five years.
Managing a startup can be a minefield, especially when the pull of entrepreneurship clouds your decision-making – and when you go it alone with no business experience. But if you do decide to start your own business, it’s a great idea to learn from other’s mistakes and set yourself up for success. Here are five mistakes to avoid:
1. Inaccurately gauging demand for your product or service.
Remember – just because you like jalapeño-flavored pickled okra, that doesn’t mean everyone likes it. Too many small businesses fail because the owner overestimates demand. Before launching your venture, find out how strong the demand is for your product or service. Is it a product or service that most people need or want? Does it fit with current trends? For instance, a DVD rental store is probably not a good investment now due to the popularity of streaming services. Before settling on a business venture, ask yourself if the benefits to the customer are compelling and easy to understand. Test demand for your product or service by vetting it with a wide range of friends and family who will be brutally honest with you.
2. Entering a crowded market without a distinct competitive advantage.
You may cook an incomparably delicious hamburger or make a mean pizza, but before you try to build a business around that talent, think about how you are going to distinguish your business from every other hamburger or pizza restaurant. It’s important to consider factors like price, taste, décor, service speed, advertising and other choices and define how you can set your business apart.
Without a well-defined competitive advantage, it’s tough to compete in a marketplace like the restaurant business, where it typically takes a lot of time and money to build a viable brand. Make sure you have a competitive advantage that stands out.
3. Forgetting to count the costs.
Like any other large-scale project, such as building a house, successfully launching a business requires a thorough, upfront accounting of costs, both financial and personal. Under capitalization is one of the top reasons for business failure, so before you launch, make sure you have a detailed budget that includes not only startup costs but the living expenses you’ll have to take on before your business can start paying you. It’s best to assume it will cost more and take longer than you initially think it will. And it’s also important to include the personal and family costs since startups can be an all-consuming enterprise. It’s better to overestimate the costs and be pleasantly surprised than to project an overly rosy scenario and end up bankrupt.
4. Failing to delegate and ignoring critical functions.
No one person is great at every facet of running a business, so make sure you identify each critical function and delegate tasks to the best person to get the job done. Use your strengths to the company’s best advantage and offload functions that others can do better.
Also, make sure you never just ignore the things you don’t like to do. You can go bankrupt just as fast for failing to pay federal payroll taxes as you can if you don’t generate sales. There are many critical functions involved in running a successful business. Get the right people on your team and be sure each one is in the right position.
5. Not planning for profitability.
One of the first things you should do when making a business plan is to define the business model. Running a non-profit or charity can be satisfying, and it definitely takes business skills, but before you can succeed in any type of business, you’ll need to know your profit model inside and out.
What is your gross margin on sales? Your net margin? How many sales do you need to break even each day or week? What is the worst case scenario, and how would you overcome it? Establish the key performance indicators (KPIs) for your business that will let you know how your company is performing. Numbers don’t lie, they’re not emotional and they don’t make excuses. If the numbers show you are in a steep decline, take action and make changes before you crash. But you can only do that if you define and measure your numbers
So how can you increase your chances of being among the 50 percent of businesses that make it for at least five years? Luck and timing definitely play a role, but you can improve your odds with careful planning and a detailed strategy. Another way to mitigate the risk of business failure is to choose a franchise business. The top franchises already provide solutions and support to help new business owners overcome potential problems.
Successful franchise companies have proven products and processes, and they have historical data and financials to work with, which are valuable resources at the planning and operations stages. Most importantly, franchise companies can provide support when you need it to make good decisions and avoid the minefield of mistakes that doom half of all small business startups. But whether you choose an established franchise or decide to go it alone, remember to avoid these five common business mistakes, and set yourself up to succeed.