TechsPlace | Starting your first small business is exciting. When you have a great idea and are ready to make the leap from being an employee to becoming a small business owner, the last thing you want to do is wait. However, doing the necessary groundwork is essential to your success. Plenty of people have traveled this road before you, so you can learn from what they did right—and what they got wrong. By now, you have likely heard the statistic that 20% of small businesses fail within the first year. What’s even more daunting is that 50% fail within the first five years.
Considering these staggering statistics, it is even more important to cover your bases from the start. From creating a sound business plan to making sure you are properly capitalized, there are certain aspects you want to pay special attention to. To maximize the chances of success in your new venture, here are some of the common pitfalls you should make sure you are aware of before you take the plunge and avoid these small business mistakes.
Ignoring Your Personal Financial Situation
In most cases, it may take a little while before you turn a profit. Having a cushion built up so you can put any money you make back into the business is a good idea. However, there’s another reason to get your finances in order. Some lenders and investors will want to know your personal finances are sound before they are willing to work with you. Plus, it just makes sense to make sure you are in a good place financially before setting out on the risky path of starting a company. You should review your credit reports, pay off any debts you can, and consider how to lessen the burden of those you can’t pay off immediately.
For example, you may be able to save money by refinancing your student loans. This can shave off some of the interest you are paying and give you lower monthly payments. Cash is king, so many options that you can come up with in order to free up liquidity is ideal. If you don’t have legacy loan costs that you can save on, perhaps refinancing your home mortgage is another idea. With the tumultuous state of the world and the economy as a whole, there is a silver lining in regards to lower interest rates.
We might see them drop even lower than they are now, but they are historically low by any measure. This could also mean that borrowing money via personal or business loans is another option.
Failing to Do Market Research
This is a big one. You think it’s a great idea, and everyone you’ve told about it loves it, so clearly it’s a winner, right? Unfortunately, in order to be a profitable business, you’ll need to sell your goods or services far beyond your immediate circle of family and friends. Planning for this can include a mix of secondary sources and your own research, such as focus groups and surveys. In addition to letting you know whether your idea is a viable one, you can also find out more about your target customers and what they want.
There are consulting agencies whose sole job is to conduct market research studies for their clients. If you want it done right, you might want to consider outsourcing this task. However, if you are strapped for cash, there are plenty of free resources online that can help steer you in the right direction.
Money Mistakes 101
There are a few common money-related errors that first-timers are particularly vulnerable to. One is simply undercharging for your goods or services. You may worry that if you overcharge, you’ll have trouble attracting customers. However, keep in mind that one element of setting a price is letting customers know what you are worth.
Too low of prices tells them that what you are selling is of little value. Overspending or underspending are also common money mistakes. While it’s true that you may need to pay for equipment and expertise, you don’t need to do it all at once and you don’t always have to pay top dollar. However, you will need to invest some capital, so be sure that you do buy what you need.
Finally, be sure to have a plan in place to collect money owed you, whether you require full payment upfront or use some other approach. Extending credit to your customers can be a savvy way to acquire and retain, however, it can be a risky move if they end up defaulting on your receivables. Setting a prompt pay discount, like 2% off the invoice for paying ahead of terms, can be a smart way to get paid sooner without insulting or upsetting your customer.