Millions of workers dream of starting their own business, but the odds of being successful are daunting enough to keep most hopefuls on the sidelines.
For those who do go into business for themselves, without a background in business, it can be a steep learning curve.
But hope springs eternal. According to the Small Business Administration, or SBA, 637,100 small businesses with employees were opened in 2007. Based on its research, the SBA estimates that two-thirds of new establishments will survive two years; only 44 percent will survive four years. The survival rate plummets to 31 percent, when the life of the business reaches seven years.
Although small businesses can crash and burn for many reasons, avoiding some of these common mistakes can help your small business beat the odds.
Use your heart, not your head
Most people start their business out of passion, but passion won’t pay the bills.
“You want to have fun and you want to be passionate about it, but a business is not a charity. You have to bring the dollars to the bottom line, and the way you do that is by measuring everything,” says Hattie Bryant, creator and host of “Small Business School” on PBS and author of “Beating the Odds,” a book on running a small business.
The energy and optimism that fuels an entrepreneur’s startup dreams are mandatory to keep them slogging when the going gets tough. But hard-nosed business sense will keep the business afloat, and that means keeping a tight fist on the money and inventory.
“What surprises me is when businesses have been in operation for a year or two, and I ask the owner what his revenue was for the last month, what his earnings were and they just sort of guess,” says Fred Glave, a Washington, D.C.-based counselor with SCORE, a free consulting service for small-business owners and entrepreneurs. The counseling staff of SCORE is made up of working or retired business owners and corporate leaders who share their expertise with their communities.
“They don’t really know, and that says to me they’re not really keeping on top of their numbers and performance,” he says.
When business owners lose sight of exactly what’s coming in and going out, it can mean that they also don’t have a handle on who buys their products and why they buy them. Understanding why things work or, conversely, why they’re not working, is vital to being successful.
“If people don’t know what their revenue is, it’s very difficult to manage the business in a tactical sense,” says Glave.
Underestimate cash needs
Business probably won’t be booming right off the bat. Just like in personal finance, keeping enough cash on hand will save your business during the rough times.
“That is the one thing I always warn people about the most,” says Fred Glave, a Washington, D.C.-based counselor with SCORE, which offers free consulting services.
“They underestimate the amount of cash they’ll need, so they don’t capitalize themselves adequately when they start,” he says. “So they run out of money and then they’re desperate.”
A related factor that contributes to underfunding is overconfidence about the amount of time necessary to build sales or clients.
“At the beginning, you’re having so much fun that you forget that you have to have dollars in the door to make a payroll, for instance. You’re having fun, but at the end of the month, you don’t have enough money,” says PBS’ Hattie Bryant, creator and host of “Small Business School.”
“For example, a big mistake that people make is thinking that they are going to make a sale really fast when in reality, it can take six months to close a sale,” she says.
Although experts recommend having at least six months’ worth of cash on hand, they also say business owners should assume they will not make a penny for a year. That may seem like a long time, but without enough cash to survive the ramp-up period, your small business may never overcome its first challenge.
“It could be a really great business for that community, but if they haven’t financed themselves enough in order to capture that market or if they have under-forecasted how long it will take to gain customers, they may run out of money before it’s had time to fully develop,” says Wendy Vinson, president of E-Myth Worldwide, a global business-coaching company based in California.
For instance, everyone has probably seen a great business move into the neighborhood and then close before the end of the first year. On its heels, a similar business moves in and makes a go of it.
So what is the difference? “It could be that they have a better value proposition. They may have spent more money figuring out how to attract their target market, or they just have more money to allow their natural ramp-up time to occur,” Vinson says.
Skip the market research
Business owners need to know the who, where and why of their business before they can sell anything. But not all business owners take the time to find out if they even have a market before jumping in, and failing to research your market can be disastrous for new companies.
Wendy Vinson, president of E-Myth Worldwide, recalls one client who, being a musician, wanted to open a music store, selling instruments and teaching lessons in the back. He investigated a couple of different towns and found out how many people went to music schools and where they really got their supplies.
“This guy was great,” Vinson says.
He researched where he would find the most people interested in music, instruments and lessons.
“He did a competitive analysis between the cities, and the one with the most opportunity was the one he chose,” Vinson says. “I can tell you that the majority of start-ups do not do that.”
In many instances, would-be business owners make decisions based on their lifestyle, such as opening on a corner near their children’s school or close to home.
“We would say, do market research, validate that your business is needed and model your service to what is needed,” Vinson says.
“Understand the competitors and how you can make (your business) stand out. What is different about yours — how you wrap your product, pricing. Some people will just throw things out randomly — even how they name their business,” she says.
Limit your understanding of the business
Check your elevator pitch. As a small-business owner, if you can’t sum up your business in about two minutes, stating concisely what you do and why your business exists, you might have problems.
“You need to be able to articulate very clearly, and in what I call a very compelling manner, what you offer, why it is of benefit and why it is different from what is out there. If you can do that, you probably understand what you are doing,” says Fred Glave, a Washington, D.C.-based counselor with SCORE, a free consulting service to small-business owners and entrepreneurs.
Treat the business like any other job
Employees who make the leap to entrepreneur can fall into the trap of treating their business as a job they’ve created for themselves.
Treating your business as any other job — except you get to be the boss — undermines the enterprise.
“Rather than seeing the business as a separate entity from themselves that has revenue and expenses that include their salary, profit margins and income, they really see it as a situation where, ‘If I’m charging $1,000 then I get to keep $1,000 minus a few things,’ ” says Wendy Vinson, president of E-Myth Worldwide.
“And that really is very much a technician or employee point of view, but they’re trying to run a business that really has a whole other set of principles,” she says.
Being inspired by the work they love can push people to take the leap into their own business. But running that business requires a different set of skills from the work they began. Sticking to the same mind set that makes a successful employee will not make a successful business owner.
Luckily, the set of skills it takes to run a successful business can be learned in classes, from books and from counselors at small-business resources such as SCORE, a Washington, D.C.-based consulting service to small-business owners and entrepreneurs.
Dreaming big comes naturally to most entrepreneurs, but business acumen is something that has to be honed and practiced.
When small-business owners don’t understand what they’re doing, why they’re doing it and how they differentiate their businesses from everyone else, it can be difficult to keep the business going when times get tough.
When things are going well, it can be too easy to lose sight of what is working if the person in charge doesn’t understand what’s driving his or her success.
Whether it’s great service, reliability or a unique product that works, knowing the business backward and forward will help owners grow and sustain the business in good times and bad.