Did you know that according to the U.S. Small Business Administration that small businesses make up 99.7% of all business in the U.S.? A small business is defined as a business with less than 500 employees (this includes the ones that are self-employed/non-employers).
No doubt, most business owners know their trade, but is that really enough to run an effective business? Did you also know that statistically, in the first 5 years, half of those new businesses will have failed? (U.S. Small Business Administration, Office of Advocacy, Frequently Asked Questions, 2016) What exactly causes such a short life expectancy in small businesses? Is it the market? Is it the inability to manage? Is it lack of work? Is it the location?
Here are some of the top eleven most common issues faced by small business owners that can sink your business.
1. Demand & Location
You’ve come up with a fantastic idea for business now it’s time to start putting it in motion. One of the most detrimental parts of opening a business is choosing a location. What is the age-old adage? Location, Location, Location. Strategically the area you pick to situate your business will determine who, what and how much work you will get. Location is detrimental to a thriving business. It is important to understand the market you are opening up into and understanding the need and want for your product. Here are a few of the most important things to consider when searching for a business location:
- You want your business to be easily accessible to your customer-base whether that means you traveling to them or they traveling to you.
- Scope out the area for your competitors, perform competitor analyses: You want to open up a pizzeria and the place you intend to open your pizzeria has 3 other pizzerias within 3 blocks of one another. Does your business have something special to offer that will make you stand out against the other 3 established pizzerias on the block?
- Research cost of living: Can you afford to pay your workers/will you have enough money to make a profit for yourself after all expenses are paid?
- Research cost of living: Can you afford to pay your workers/will you have enough money to make a profit for yourself after all expenses are paid?
- Check out the demographics for the area: is your product something that would appeal to the local people? You wouldn’t want to open a paintball field in a primarily elderly community; it wouldn’t do well for business.
- Check out local laws: Laws might dictate whether or not your business is even ALLOWED in the area you are considering. For example, if you’re looking to open up a small deli and mart and are looking in areas near schools, consider whether or not you’re planning to sell alcohol as many areas have laws that prohibit liquor licenses near schools and churches.
2. Dedication & Poor Management
When you own your own business, you don’t just go to work to facilitate your life, your work is your life. It is a 24 hour/7 days a week feat. When you have your own business you aren’t just the boss either, you’re the finance department, the marketing department, the sales department, customer service, the production department, the facilities manager, the expert in your field and every other part that makes up a business. You’re in charge of it all, especially at the beginning when you’re just venturing out on your own. There are long hours and hard decisions that are to be made and it takes YEARS to build up a clientele that is loyal to you.
3. Lack of Funds
One of the hardest things for a small and new business is to gain capital. Having capital allows you to grow your company. Government contracts are becoming an important income source for many companies nowadays and without enough capital these business opportunities become unattainable. Depending on the state you’re in, there are programs available to help facilitate capital to small companies. In NY, visit the Small Business Services website or NYC’s to learn more.
4. Overspending
While it’s true you need to have money in order to make money, you also have to keep a close eye on what your money is being used for. Many business owners have the trouble of properly monitoring their cash flow. You know how hard it is to get that loan and how hard it was to earn those paychecks, so choose wisely on what you spend and always get the most for it. Create a budget and stick to it. When you properly divide your money up, you’ll know where to properly spend and how much you can spend.
5. Overreaching/Expansion
When your business ball gets rolling, it can be hard to keep track of it. It’s common in business, especially at the beginning when you’re thirsty for work, to say yes to customers first and figure out how to make it work second, even when your customers are asking for something that isn’t realistic for you. This could be for several reasons including, lack of manpower or production time, schedule conflicts, client needs vs. cost or perhaps you don’t have the expertise to do what the client is asking for (even if you really want to try it.) Whatever the case may be, there are plenty of textbook scenarios that have led to disaster when a business bites off more than it can chew. Remember, you went into your trade for a reason – because you know it and you love it and you do it better than the rest. Don’t ruin that image by taking on more than you can handle too quickly. Evaluate your opportunities and choose wisely. It is worse for your business to work on a job and perform poorly than it is to either reschedule or admit that what they are asking of you is not what you do. Overreaching/Expansion too quickly can cause you to spread yourself thin – thus lowering your cash flow and your credibility as a company, which ultimately can lead you to shut down. Plan properly. Slow and Steady growth is best.
6. Marketing
When you’re just getting started, it doesn’t matter if you’re the best or cheapest in the business if no one knows who you are or where to find you. This one goes hand in hand with location. Seek out profitable channels to market yourself in and choose wisely – not all channels will have as great of a ROI as other channels and as a small business with limited capital, you want to get the most for your money. Do your research. You are going to have to pay a few dollars to market your business especially at the beginning but with advertising, you’ll make that money back and then some.
7. Customer Concentration
Customer concentration is a term used to define how diverse your sources of income are based on your quantity in customers. Do you have a large amount of different customers or are most of your customers mainly the same few individuals and businesses? Many small businesses have 1 or 2 very large customers who provide a large sum of work for them. While obviously, business is business and it’s great to have the work, a business that depends on a single customer or two is at risk because you have no control whether that client will be around tomorrow. While there are pros to having a low amount of customers like better time and access to tailor your product to each customer’s needs, which builds great quality and loyalty, there are also limitations to having a small number of clients, like putting all of your eggs into one basket. Should you lose that client for whatever reason, your business could be devastated. Also, customers that give you a large amount of work may begin to push for discounts which can affect your profit margin.
8. Failure to Compete with your Competition
Customers do not owe you loyalty. It’s something you have to earn and even then, there’s no guarantee that a customer will be exclusive to you. There are plenty of other businesses out there doing the same thing as you. Many business owners can get arrogant in their own abilities. While you may very well be the best in the industry, there is always room for improvement whether that be through price, utilization of time and effort, material, methodology, customer service or even through your marketing techniques. Yes, there are the sayings like ‘don’t fix what isn’t broken’ and ‘why reinvent the wheel?’ However, should you not grow with the times, you will become a thing of the past. Your core values and product don’t necessarily have to change, but consider what your competitors are offering their clients and how that can impact you and your business. If you’re not continually improving, your competitors are and they will eventually progress ahead of you.
9. Pricing
Be sure to price your product properly. If you try to overprice to gain a profit, you will eventually lose business. However, if you price too low, you will be cutting corners on the other parts of your business whether that is labor, location, materials or any other department, and can lead to you going out of business. Your pricing should consider how much operating expenses are to maintain your business (rent, labor, taxes etc) and profit (how much you gain after all the other bills are paid). You should always be able to justify why your pricing is what it is.
10. Planning
Think about your vision for your company. Is it your company as a mature and fruitful business with no regard to how it got to that point? This vision is years down the line. At the beginning, this will not be the case. From humble beginnings come great things – you have the dream and the determination, now it’s time to map out the steps to reach that dream. Make a business plan, this involves evaluating your business as a whole, including your workers, your operating expenses, your cashflow, the market and create a projection based off of reasonable growth opportunity and goals. Slow and Steady Growth has been statistically more stable and efficient than short and fast growth spurts. Also consider your management. Many entrepreneurs new in business believe that they should be involved in every part of their business which will leave you exhausted and burnt out. Plus, if everything has to trickle through one person all the time, there will always be more people waiting than there are working, which means time is not being utilized as efficiently as it could be. Show confidence in your employees, you hired them for a reason and maybe at the beginning you have your hands deep in all parts of your company, but over time your workers should be able to work independently of you.
11. Not Growing with Technology
To not incorporate technology into your business is a hindrance to you as most of the consumer world moves with the growth of technology. From methods of receiving payment and forming (as well as maintaining) your presence on the web, to social media and various other industry related methods, these are all ways to grow your company. Some examples include restaurant businesses incorporating online ordering forms or in the construction industry, using the latest technologies to properly calculate quantities or critical paths. Use technology to increase your efficiency and your accuracy. Integrating technology will create an easier access path for your customers and may even establish you as a credible source in their eyes.