The SBA records the openings of more than 500,000 new companies each year. The startup rate of sole proprietorships has been increasing by about 2% annually since 2001.
Unfortunately, the numbers also predict that about half of those new companies won’t survive more than three years, and only about 39% will still be around for their sixth birthday. Peri Pakroo, author of The Small Business Startup Kit, says most business failures stem from the following easily preventable missteps.
So before you pour your heart — not to mention your time, money, and effort — into opening your own company, take a moment to review some common startup mistakes and learn how to avoid them:
Winging it. The single most important element toward ensuring success for your operation is developing a long-range business plan. “Owners need to plan where they want to be, both for their families and their businesses,” Pakroo says. “Set goals for where you want the company to be in one, two, and five years. If you don’t have targets beyond the first six months or a year, your business will essentially stay the same and not grow into something bigger.”
Find out more about how to write a business plan in the startup guide at the the SBA’s intro site or download business-planning software from one of the myriad companies that sell it online. The key is simply sitting down to put a plan on paper — a step that eager entrepreneurs often cast aside.
Lack of capital. It’s pretty much a given that you’ll need more than you think to make it through the startup phase — and past breakeven. Part of your long-range plan should be an honest and realistic assessment of how much money you’ll need to start and then to grow.
“If you’re just making enough to break even, you won’t be able to take advantage of opportunities that come up, like a great sale from a wholesaler or an opportunity to buy another business that would be a logical addition to your firm,” Pakroo says. “Shallow reserves — coupled with inadequate financing — threaten payroll, prevent your business from hiring top caliber employees, limit your marketing activities, weaken R&D efforts, and reduce large-volume purchasing power.”
Not knowing a banker. Banks can provide lifelines during the formative stages of your business, providing essential loans and consulting on important practices. Build a close relationship with your banker early on to ensure the growth and success of your business.
“Find a community bank — one that’s headquartered in your city or state and has an economic interest in local business development,” Pakroo recommends. “If you develop a strong relationship with that institution, you’ll have a financial resource to turn to when you need a loan and someone to hold your hand through the application process. If you come into a bank as an unknown company, that will definitely hurt your chances.”
No management training. It’s very common for new business owners to be excellent at their skill or service, but totally inexperienced in management. It’s important to develop some managerial skills that can positively affect your company’s productivity and growth. Search out small-business training online, in your area, or at a community college or university nearby.
“Management isn’t necessarily rocket science,” Pakroo says. “For instance, you can start with your business plan and define natural job breakdowns into job descriptions for your employees. But if you don’t do that, you’ll wind up hiring somebody without a clear idea of what their title is, and what their responsibilities are.”
Confusing sales with profit. Pricing is a major problem for many new business owners because they want to undercut the going price in order to boost early sales. But undercutting the competition doesn’t ensure success, especially if you’re not making a profit on each sale. Before you set your price, shop the competition to figure out what they’re charging, then include your overhead and profit margin up-front in your price point.
Losing track of your money. You must track your income and expenses every month in order to ensure you’re not losing money. Operating statements and balance sheets should be used as an early-warning system for spotting operating problems like surplus inventory.
“Just because you’re keeping the books up-to-date and entering your receipts, those numbers aren’t useful unless you’re generating reports from that data,” Pakroo says. “You should have monthly profit-and-loss reports and regular cash-flow statements. The cash-flow report looks at what you’ve spent and earned. You can use it to estimate into the future. You don’t want to find out on the day the bill is due that you can’t pay the printer.”
Pinching pennies on essential help. Many owners are reluctant to spend money to hire legal consultants and accountants as advisers. But you must have an accountant at setup time, and you should have a look at your books at least once a year, Pakroo says, even if you do your own taxes. “An accountant will give you valuable advice on how to keep your books, when to spend money, and how to employ tax-minimizing strategies,” she says.
Hire an attorney to advise you on setting up your business structure. But you can probably get by without paying a lawyer regularly until you get to the stage where you have high-dollar contracts that should be reviewed. Solid, do-it-yourself legal materials can be found at Web sites like Nolo that allow you to customize and download forms at a minimal cost.