THE 13 WORST BUSINESS START-UP MISTAKES
Authored By: Jim O'Donnell
As a business consultant who has worked with hundreds of small businesses, I have encountered a myriad common business start-up mistakes made by aspiring entrepreneurs. Some of these mistakes cause great difficulty for the business owner and minimize profitability while other mistakes may even cause the business to fail. Prevention is always the best cure. Being aware of potential pitfalls will help an entrepreneur avoid them, or at least be able to plan for them in advance.
1. Undercapitization: The primary reason most new businesses fail is because of the lack of start-up investment funds. This is usually due to the entrepreneur greatly underestimating the required start-up costs, underestimating the need for working capital, and failing to think about how to obtain additional capital should it be required.
2. Shortage of Cash: Entrepreneurs typically underestimate the amount of cash needed to operate the business. They forget that sometimes customers pay very slowly and when funds fail to arrive as anticipated, the business is severely constrained. Every day expenses always cost more than expected. Small businesses need this cash to grow. A Cash Flow Statement is a critical management tool for estimating revenue and expenses on a monthly basis for a year in advance. Utilizing a Cash Flow Statement would help identify future cash flow requirements - it is important to be aggressive when estimating expenses and very conservative when estimating sales and revenue goals.
3. Incorrect Sales Forecasts: Many business owners are terminally optimistic and overestimate the number of potential buyers for their product or service, especially during the first year of operation. Without conducting the proper market research, it becomes very difficult to accurately predict sales in a new market. As stated in the previous paragraph, be conservative!
4. Improper Market Testing: Expecting to generate a lot of sales based on research obtained only by polling friends, neighbors, and relatives is a big mistake. If your product or service is not quite up to par, they probably will not be completely truthful with you because they won't want to hurt your feelings or be too critical. The larger and broader based population needs to be polled. Applying limited time and resources toward this function is a prescription for disaster.
5. Weak Business Plan: Developing a well thought out and comprehensive business plan is the first real test of an entrepreneur's commitment to starting a business. The business plan is your road map for conducting daily operations, it is a vehicle to help you think through all the long-range implications, and it is a tool for measuring your progress. Without a plan, it will be next to impossible to raise start-up capital. The best piece of advice I can give you is "Write the Business Plan yourself" - DO NOT pay someone to do this valuable exercise for you. You will learn a great deal about your business by writing, researching, and projecting cash flow yourself. However, it is prudent to have a qualified expert assist you with many of these tasks and to periodically review your progress as well as your final draft of the business plan. For a NO-COST guide to writing your Business Plan: Business Plan Guide.
6. Improper Price Setting: Most new businesses price their products too low with the expectation that a low price will attract more buyers. A low price, however, may have just the opposite effect because buyers may question the quality of your goods and services. Knowing what the market will bear and understanding competitive pricing is one of the keys to generating profit. Start-ups typically underestimate the cost of producing or developing their products as well as underestimating the costs of sales, marketing and distribution. Low retail prices and high costs cause low profit margins resulting in a shortage of working capital.
7. Failure to Delegate Authority: One of the primary reasons an entrepreneur starts a business is because they want to be in control of their own destiny. Delegation is oftentimes negatively viewed by an entrepreneur as giving up control rather than the more enlightened viewpoint of transferring responsibility. The business owner may fear being too dependent on others or fear that an employee will steal their ideas. The trap is that without delegating responsibilities to employees, the business will only have limited growth based on the boundaries of the entrepreneur's personal time, activity, and skill sets.
8. Lack of Objective Advice: The money spent on accountants, attorneys, and consultants could be the best investment you make if it helps you get started with a minimum of difficulty and avoids potential pitfalls. Seek an independent and unemotional evaluation of your business plan, marketing strategies, and sales forecasts. Establish a board of directors or a management advisory committee with members who have broad based business experience. Smart business owners will "fill in" their knowledge gaps by utilizing outside resources.
9. Rushing to Market: Because of a need for cash, a company may prematurely introduce its products to the marketplace long before they are ready to be launched. This usually results in customer dissatisfaction because of quality problems or the lack of full product functionality. Much time and effort is expended fixing problems rather than working on functionality or product enhancements. The company may then acquire a poor reputation from which it would be most difficult to recover.
10. Lack of Flexibility: A very competitive environment may require the company to be flexible with its product offering, pricing, and customer service policies to succeed. A customer may want a variation of your product and you will want to be flexible enough to take advantage of these opportunities. Being "strapped for cash" means lacking the luxury of maneuverability and the inability to respond to competitive initiatives which are always present.
11. Ego of the Owner: Having a strong ego is a common trait among entrepreneurs and this is what usually propels them to start a business. Unfortunately they sometimes feel they know better and can do better than anyone else. Because of their strong egos, failing to admit mistakes is viewed as a sign of weakness. Refusing to recognize, acknowledge and correct mistakes, being trapped in the "I can do it all" syndrome, and failing to seek good advice until it is too late will always be a hindrance to success.
12. Weak Incentives: Many new business owners fail to establish reasonable incentives for their employees. It is important to understand that high expectations for both hard work and long hours from the employees require commensurate rewards. A low base salary requires supplemental compensation in the form of a bonus, stock options, profit sharing, flexible work schedules, etc. Keeping talented and highly motivated employees is crucial to success.
13. Lack of Formal Agreements: Good contracts make for good business relationships. Conversely, no contract, or a poorly conceived contract, can cause many long term problems. Secure contracts with customers that accurately define performance levels, price, and delivery schedules. Obtain employee agreements that have non-compete and confidentiality clauses. When borrowing money from family and friends, always have an agreement itemizing principal, interest, and a payment schedule.
Summary: Without exception, every one of the clients I have counseled that is in some sort of trouble or is experiencing difficulty has either not developed a detailed business plan or has never constructed a cash flow statement that was founded on good market research and a conservative sales forecast. Doing a thorough job on these two critical components would have prevented many of the start-up mistakes that were discussed above. Mistakes should be made and corrected during the business planning stage, not after you have opened your doors for business.
Business Start-up Checklist: Turn your great idea into a profitable business. With over 400 insightful questions and action steps, this checklist will educate you regarding the key elements and considerations required to ensure the successful launch of your new business. Avoid the costly mistakes that most entrepreneurs make when starting their business. This checklist is based on the author's experience with hundreds of small businesses. For a more detailed description and sample pages: More Info.