Every busy downtown street has a storefront location that is "cursed." One month it was a pizza place. Six months later it was an optometrist's office. Four months later it was a video rental store. Now it's vacant yet again.
Are supernatural forces really to blame for these failures, or did the owners simply make lousy business decisions?
The famous statistic that 80 percent of new businesses fail within five years is a bit of an urban legend. According to small businesses data from the U.S. Census Bureau, 76 percent of small businesses operating in 1992 were still running in 1996. And only 17 percent of small businesses that closed in 1997 were due to bankruptcies [source: U.S. Department of Labor].
Small businesses are still the engine of the U.S. economy, and entrepreneurs still constitute the vast majority of employers. In 2007, an average of 497,000 new businesses were created each month in the United States [source: Fairlie].
If you're thinking about joining the ranks of the self-employed, then start by learning from the mistakes of others. The following is a list, in no particular order, of the 10 most common problems faced by new businesses.
Poor Market Research
The foundation of every successful business is a rock-solid idea. But how do you know if your new business idea is any good? Your best friend might think it's brilliant, but what if your customers think it's lousy? So before you invest a single penny in your new business, you need to conduct market research.
A common problem for new businesses is that they overestimate the size of their potential market. All products and services have one or more target demographics. An automatic shoe buffer isn't going to sell well with 12- to 24-year-old females. It would be much smarter to target 50- to 65-year-old men. Go to the U.S. Census Bureau Web site and see how many older men with salaries above $75,000 a year (more likely to wear dress shoes daily) live in your area. Now you have a realistic projection of the size of your target market.
Other good resources for free market research are trade shows and expositions [source: Entrepreneur]. Take a prototype of your shoe buffer to a technology or housewares show and solicit feedback from attendees and vendors.
Pay particular attention to negative feedback. One common mistake of entrepreneurs is to filter out everything but the most positive comments. It will cost you much less time and money to fix a problem in the prototype stage than to make changes when you're already in production.
Bad Business Plan
Too many entrepreneurs subscribe to the "paper napkin" fantasy; all you need is an ingenious idea scribbled on a napkin, and the millions start rolling in. The truth is that no new business has ever succeeded without a detailed and thorough business plan.
Writing a business plan will help you focus the mission and scope of your business, figure out exactly how the business will run and realistically project how much money the business will make [source: Spaeder].
A common problem for new businesses is that they rush a product or service to market without a clear focus [source: Henricks]. The result is that the business owner ends up chasing too many potential markets and new products. At the beginning, it's much more important to have a single focus with a proven client base.
All good business plans should include honest sales projections based on solid market research and competitive analysis. If there's another organic sandwich shop in town, don't expect your sales to be much higher. In fact, they'll probably be significantly lower at the beginning.
Think of your business plan as an investment in your future. If you consider every detail now, there will be fewer surprises later. To help you get started, check out the sample business plans available at the U.S. Small Business Administration's Web site.
Not Enough Startup Money
In a 2004 survey of new business closures, 79 percent of respondents cited starting out with too little money as one of the chief causes of their failure [source: Sugars]. This is where a detailed and honest business plan can really save the day.
A common and deadly mistake is to assume instant profitability [source: NFIB]. The experts recommend planning for the worst, meaning at least two years before turning a profit. In your business plan, write up a detailed budget that will sustain you through those lean times. Once you've figured out how much startup capital you'll need in the bank, add 50 percent just to be safe [source: Krotz].
One way to save startup capital is to start as simply as possible. A common mistake of new businesses is to invest heavily in unnecessary luxuries like fancy office chairs or even an office at all! Many successful businesses begin in the home. Don't run out and hire 10 employees or launch an expensive marketing campaign. Be patient and start slowly.
Remember that even if you have clients locked in before you launch, not all of those clients will pay immediately. There might be a significant lag between the time you perform your service and time you have the cash in the bank. In the meantime, you'll still have employees and suppliers to pay. Don't let cash flow problems sneak up on you.
Charging Too Little
One of the most common problems of new businesses is trying to beat the competition by offering lower prices. Unless you're Wal-Mart, this strategy is not going to work. And here's why.
Larger, more established companies save money by purchasing on scale. They've learned how to cut costs through longstanding relationships with suppliers and through careful logistical planning. Wal-Mart, for example, can offer low prices because it has exclusive contracts with suppliers. Suppliers give Wal-Mart rock-bottom wholesale rates because they know the multinational chain is going to buy 100 million units.
You're not so lucky. It will take time to build relationships with suppliers. And since you're starting small, you won't be able to get the lowest wholesale prices. If you try to beat Wal-Mart's retail prices, then you simply won't make any money.
The better strategy is to price your goods or services at a fair market value and try to beat the competition on high quality, customer service and your "unique selling proposition," also known as marketing [source: Krotz].
Poor Marketing Strategy
One of the most important elements of a successful business plan is a well-researched marketing plan. It starts with the market data you produced from census reports, feedback and competitive analysis. Once you have a clearly defined target customer, you need to design a marketing campaign that turns him or her into a paying customer.
A common problem for new businesses is to rush into newspaper ads, glossy brochures, billboards and radio commercials. The first consideration should be the budget. You need to figure out how much each type of advertising costs and how many of your potential customers it will reach. Opt for the marketing strategy that gives you the most bang for the buck.
Another danger of rushing into an expensive marketing campaign is that you haven't truly solidified your product, service or business model. Let's say your marketing campaign is a huge success, driving hundreds of first-time customers to your store. If your employees aren't properly trained or you're still getting the "kinks" out of your product, then all of these customers are going to have a lousy experience. And bad word of mouth is the worst kind of marketing.
An even bigger problem is to assume that marketing will take care of itself. A clear marketing strategy is a necessity for any business. Marketing informs what products you sell and how you sell them. It dictates important budgeting and long-term planning decisions. It affects how many employees you need. Word of mouth is great, but it doesn't constitute a marketing plan.
Wrong Fiscal Motivation
Entrepreneurs need to ask themselves a lot of important questions before launching a new business. What is the best product? Who is my target customer? Where would be the best location? But perhaps the most important question of all is, "Why?"
A common problem of many new businesses is to take a huge financial risk for the wrong reason. Too many entrepreneurs are motivated chiefly by the desire to be their own boss [source: Mount]. The truth is that you will always have a boss: the customer. And you might even find that cranky customers are harder to deal with than a grumpy boss.
If you start your own business simply because you're sick of your old job or you want to work fewer hours, those are bad motivations. The truth is that successful new business owners average 50 to 60 hours of work a week for at least the first two years [source: Gallagher]. That kind of commitment requires a real passion for the project. Anything less than full commitment will mean failure.
The greatest motivation for starting a new business, not surprisingly, is to make money [source: Mount]. You don't have to be in it to earn millions, but no one starts a business with the goal of losing cash. If your chief motivation is to make money, then you will take the necessary steps to ensure that your business plan is sharp, your product is of the highest quality and your employees are well-trained.
Forgetting About Family
New businesses are a tremendous time commitment. It's not uncommon for entrepreneurs to spend every waking hour thinking about some aspect of their fledgling business. Even if they're not physically at the office, they're brainstorming about marketing ideas, worrying about bank loans and debating colors for the new sign.
While launching a new business is exciting, it's also financially stressful. Financial stress is among the top causes of divorce in the United States [source: Orr]. This is why married couples need to be equally committed to starting a new business. Even if only one spouse is an active partner in the venture, both need to believe in making sacrifices for its success.
The same is true for the entire family. A teenager might need to cut back on personal spending so his parents have more money for the business. Grandparents might need to babysit the grandkids more so that mom and dad can stay late at the store.
It's equally important, however, that the entrepreneur remembers to makes time for family and friends. These support networks are what will sustain him or her through the long hours and stressful financial times ahead.
Borrowing from Friends and Family
While family and friends can provide important emotional support for a new business, entrepreneurs should think twice about asking loved ones for financial support.
Undoubtedly, it's easier to secure a loan from Aunt Hazel than a venture capital firm in Silicon Valley. The venture capitalists will ask for a detailed business plan with clear profitability estimates. They'll want to see your market research and run tests on your product. Aunt Hazel might just ask you to clean out the attic first.
Easy money is not always the best kind of money, however. Aunt Hazel might not be the most savvy investor. She might not spot the gaping holes in your business plan or the general lousiness of your idea. The venture capitalists most definitely will.
If you secure a loan from a third-party lender, then you've passed an important litmus test. It's proof that you've done your homework. Banks don't lend money because they love you. They lend you money because they want it back with interest. If a conservative institution like a commercial lender thinks you're going to succeed, then that's a good sign.
Relying on family as investors also has the potential to create a "too many cooks in the kitchen" problem. You don't want to receive six different opinions for every business decision you make. And managing all of those relationships will quickly take time away from more important business matters.
Trying to Do Too Much By Yourself
A common problem for many new business owners is that they think they can do everything on their own. This "one-man band" strategy might be a great way to keep costs low at first, but it's not the smartest way to ensure long-term success.
You may not need to go out and hire full-time employees, but small business experts say that all entrepreneurs need at least two additional team members: a lawyer and an accountant [source: NFIB]. Find an experienced, highly recommended small business lawyer and pay him or her a retainer. You don't want to have to scramble to find a lawyer when you desperately need one.
The same is true of an accountant. Do your homework and find a reliable accountant with experience working with small businesses. You should do this well before tax season so that you don't feel rushed. A good accountant can help you organize your financial records from the beginning to make everything easier later on.
When you decide that you can afford to hire more employees -- perhaps a full-time marketing professional or a salesperson -- spend the time and energy to find the most qualified person for the job. Good employees are one of the most important investments you can make in your business. Never hire friends or relatives out of pure convenience [source: Henricks]. It's hard enough to fire a stranger, let along your brother.
Choosing a Bad Business Location
A common new business mistake is to assume that you need an office or a storefront immediately. If your house is zoned to allow a small business, then use the space you are already paying for.
Many service businesses -- a cleaning service, plumbing service or roofing operation -- don't need an office at all [source: Nolo.com]. Your "office" can be the front seat of your van with a cell phone. All of your work is done at the client's site, anyway.
If you're convinced that you will need to rent space for your new business, then it should be part of your business plan. Make a detailed list of the location's requirements. How much space do you need? Do you want high foot traffic? Will you need parking? Do you need visibility, or is it OK to be tucked away in a suburban office park? What are your zoning requirements?
Then you need to do research into the rental market. What is the average monthly rent on a place that meets your criteria? Consider consulting with a commercial real estate agent who really knows the local market. Once you have a price in mind, lock it into your budget and don't be tempted to splurge on the perfect location.
Also remember to budget for improvements or alterations that will need to be made to your location. If you want to open a restaurant in an old shoe store, plan for significant costs to install a professional kitchen and bathrooms that are up to code.
For lots more information about small business management, follow the helpful links on the next page.
Starting a bank requires a good business plan, raising capital and going through a complex regulatory process.
Related HowStuffWorks Articles
More Great Links
- Entrepreneur. "Market Testing." (April 16, 2009)http://www.entrepreneur.com/encyclopedia/term/82442.html
- Fairlie, Robert W. "Kauffman Index of Entrepreneurial Activity: 1996-2007." April 2008 (April 17, 2009)http://sites.kauffman.org/pdf/KIEA_041408.pdf
- Gallagher, Dave. The Bellingham Herald. "Top reasons why new businesses fail…" January 6, 2009 (April 15, 2009)http://blogs.bellinghamherald.com/index.php?blog=15&title=top_reasons_why_new_businesses_fail&more=1&c=1&tb=1&pb=1
- Henricks, Mark. Entrepreneur. "Top 17 Startup Mistakes You Can't Afford to Make." November 15, 2006 (April 16, 2009)http://smallbusiness.aol.com/start/startup/article/_a/top-17-startup-mistakes-you-cant-afford/20051213184209990014
- Krotz, Joanna L. Microsoft Small Business Center. "7 biggest mistakes of business startups" (April 16, 2009)http://www.microsoft.com/smallbusiness/resources/startups/business-plans-entities/7-biggest-mistakes-of-business-startups.aspx#biggestmistakesofbusinessstartups
- Laurence, Bethany K. Nolo.com. "Write a Business Plan." (April 16, 2009)http://www.nolo.com/article.cfm/pg/1/objectId/607620B7-1E90-411F-B073E9DDB9E30A48/catId/E67C08E9-9FAE-4AD8-840371947878E573/111/228/289/CHK/
- Mount, Ian. Fortune Small Business. "Want to start a 'biz? Here's what matters." December 16, 2008 (April 16, 2009)http://money.cnn.com/2008/10/31/smallbusiness/entrepreneurial_myths.fsb/index.htm
- NFIB. "Beginner's Business Mistakes" (April 15, 2009)http://www.nfib.com/tabid/56/Default.aspx?cmsid=45268&v=1
- Nolo.com. "Choosing a Successful Location for Your Business" (April 16, 2009)http://www.nolo.com/article.cfm/objectId/3AFBBD6F-1BDF-403A-A78ABD2109684A46/111/228/142/ART/
- Orr, Susan. Evansville Courier & Press. "In good times and bad? Financial troubles can cause marital strife." March 14, 2009 (April 16, 2009)http://www.courierpress.com/news/2009/mar/14/in-good-times-and-in-bad/
- Spaeder, Karen E. Entrepreneur. "Biggest Start-Up Mistakes to Avoid." May 12, 2003 (April 16, 2009)http://www.entrepreneur.com/startingabusiness/startupbasics/article61744.html
- Sugars, Brad. Entrepreneur. "The 6 Biggest Mistakes in Raising Startup Capital." September 20, 2007 (April 16, 2009)http://www.entrepreneur.com/startingabusiness/startupbasics/startupbasicscolumnistbradsugars/article184350.html
- U.S. Department of Labor. "Small Business in America." (April 15, 2009) http://www.dol.gov/odep/pubs/ek00/small.htm