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Pitfalls Your Small Business Should Avoid

Failures are a result of poor management and lack of knowledge about the way business work.

Of major concern to any would-be entrepreneur is the chance of success or failure of his proposed business. Nobody wants to talk about the possibility of your small business failing. But talking about the dangers and looking very closely at the reasons why a business fails is an important step to preventing the failure in the first place. With careful planning, shrewd management, and steadfast vision, you can steer your fledgling business away from the pitfalls that have caused other small businesses to stumble and falter.

The statistics are enough to make any entrepreneur a little wary. Around half of all small businesses fail within the first four years. According to U.S. credit information provider, Dun & Bradstreet, 90 % of these failures are a result of poor management and lack of knowledge about the way businesses work. For these reasons, it simply makes good business sense to learn from those that have shut down, study the problems that spelled their demise, and in this way, increase your own business' likelihood of success.

Poor Planning

Basically, this means writing up a business plan. While the mere absence of a business plan is not necessarily a harbinger for failure, it does mean there will be fewer obstacles along the way. In order to be successful, entrepreneurs must take the time necessary to see that their business is well conceived. At the very least, committing time and thought to a business plan ensures that the entrepreneur has sorted through every aspect of his prospective business, even those areas that are technically not his specialty. Moreover, a business plan gives the entrepreneur some kind of guide or compass, so he can maintain his direction, even while he encounters a rough patch.

An entrepreneur that has done his business plan is the equivalent of a student that has done his homework. It makes him better prepared to handle any difficulties or pitfalls that come his way.

Answer these questions when drawing up a business plan: What gap will my business fill? What is my unique selling point which none of my other competitors can provide? What legal structure will my business inhabit? Where will I get my capital and financing? How will the business be managed and who will take responsibility for that management? What is my monthly operating budget? What kind of marketing initiatives will I need to undertake for my business? When do I expect to break even? When do I expect to turn a profit?

All these concerns are part and parcel of the business plan, and should be addressed beforehand.

A significant part of planning also involves choosing the right location for your business. Even the best business will fail if it is in the wrong place, whether it is an Internet café, a bakery or a hardware store. Even at the planning stages, it would be wise to spend some quality time determining the best location for your business.


Due to a weak or even flawed understanding of finances, many novice entrepreneurs make the mistake of underestimating the amount of money they need to set themselves up. Some do not even make a distinction between the funds for starting the business and the funds for operating the business, otherwise known as working capital. The result is they end up borrowing only for the short-term, and in the process, the business creaks to a halt when they realize they simply don't have enough capital to operate.

The other mistake that also has to do with capital is that many entrepreneurs not only overestimate their timeframe for generating profit, they also fail to account for factors outside their control like a slow economy. What is required is a shrewd calculation of the breakeven point. That is, the sales level at which your business has neither a profit nor a loss. Estimating a breakeven will give you an idea of where your sales need to be per day, per month, and per year. Studies have shown that for most small businesses, it takes three years to break even, and five years to see profit. This reality should therefore have direct bearing on the process of securing capital to start and run the business until that point.

Economic Timing

Here is a factor that few entrepreneurs truly consider, but that can have detrimental effects on their business. Hard economic times will not only cause a new business to stumble, they can also be the death of it. Surprisingly, economic timing can make a big difference. Businesses that start during a recession have a greater chance of failure than those that start during expansion periods. In fact, quite a number of very feasible businesses are forced to go under because of a slow economy. This phenomenon is evident in the U.S. and Europe as well as in Asia. According to a study conducted by Robert Lussier of Springfield College, who spoke to 100 entrepreneurs with failed small businesses, a slow economy was cited by 30% of the respondents.

This does not necessarily mean that one should not venture forth with a good business idea in hard times. However, entrepreneurs must undertake extensive planning and allow for the slow economy and its possible effects on their potential profit. You must undertake the measures necessary to keep your business alive during periods of economic recession.

To combat or prepare for the effects of an ailing economy, veteran businessmen suggest cultivating your credit while you have the cash in hand. A good business practice is to build credit rating with local banks by borrowing anywhere from $1000 to $10,000 periodically, placing it in a time deposit, then returning it a month before its due. This strengthens the likelihood of a loan approval, if and when you really need it.

The Money Pit: Cash Flow Problems

While businesses have been known to survive the occasional cash flow problems, quite a number succumb under their burden. Figuring out how the money comes into and out of your business is the very foundation of success. After all, even profitable ventures will flounder if they run out of cash or have difficulty making ends meet for operating expenses every month.

Frequently, cash flow problems are due to slow accounts receivable and poor collection methods. You must ensure immediate if not prompt payment by your customers. At the very least, they should make a down payment on the service provided. Have a firm, straightforward approach to collecting on delinquent accounts and make this part of your standard operating procedure.

The other factor that causes cash flow problems is simply excessive expenditures ostensibly for business operations. Suppliers will tap you and try to sell you new models of equipment or some other office enhancements. In the early stages, when a small company has yet to break even, it is better to refrain from these kinds of expenditures.

Finally, bear in mind that small businesses with high growth rates can experience daunting cash flow problems. Although your sales may be on the rise, your profit margins are still not generating enough funds to maintain the required inventory for that level of sales. When this happens, a business can slip into even more difficulties: not meeting payroll, not being able to pay rent. Growth for a business is a good thing, but it has to be managed carefully so it does not ultimately harm the business.

A Note On E-Businesses

The two most cited problems for businesses on the Internet are not unrelated to the factors mentioned above. Spending too much money at the outset for the creation of the site, and not leaving enough for the site's maintenance is the first. The other most common problem is having a site that does not function well or that is not user-friendly. Either or both of these in combination may lead to a situation that can mean the end of your business.

Facing Failure

Any number of the above factors as well as a combination of them can mean the failure of your small business. But knowledge is power. Entrepreneurs can cruise along smoothly if they take to heart these lessons. And if, despite all your best efforts, the business still fails, take some advice from veteran entrepreneur, Jennifer Kushell, author of The Young Entrepreneur's Edge: Using Your Ambition, Independence, and Youth to Launch a Successful Business. According to Ms Kushell, a business failing is devastating, only if you borrowed a lot of money, built up a lot of overhead, hired a large number of full-time staff, or left customers with unfulfilled orders. If you're in dire straits, be creative in finding solutions. Try to cut down your overhead. Change the course that you have chosen by altering your business model, services, or product offerings. If it no longer seems worth the time or the effort, you should move on to something else. Closing shop is not the worst thing that can happen. More importantly, you'll have learned important lessons that will keep you from committing the same mistakes, the next time around.

Ms Kushell also says, if you really believe in your business, keep going even in the face of tough times.

Consider software giant, Microsoft. Here's a multi-million-dollar conglomerate that started out as a small business but now thoroughly dominates its market. Although Bill Gates and his partner Paul Allen suffered their own share of problems initially, and did not profit in their second year of operation, they persevered. They had an unwavering commitment to their vision, and the willingness to take a risk for success. Ultimately, that is what all businesses need to succeed.

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