According to the SBA, only 50% of new small businesses make it through their first 5 years and the number falls to 25% as you get closer to 10 years. There are a number of factors that contribute to the success or failure of each individual company but businesses that struggle to profit or grow typically have made one or more of the following mistakes.
1. Not Writing Down Your Business Plan and Following It
Of all the mistakes that small business owners make this is probably the most common. It is also the mistake that has the biggest impact on your business. Your business plan is your roadmap of where you plan to go and the bar you use to evaluate your progress. It can be as detailed or general as you want, but should include enough information that it provides direction for your business and should be written down. All assumptions used in drafting the plan should be realistic and not overly optimistic, a business plan not grounded in reality will do you no good.
Another mistake that business owners make is creating a written, comprehensive, and realistic business plan and then sticking it in a drawer when its done and never looking at it again. It should be referenced often and consulted when you start to feel like the business is getting off track. It is also a fluid document and can change as you figure out what works and what doesn’t in your industry and market. There are plenty of templates online that will help you get started and if it’s for a business you are planning on starting it is a good idea to have it reviewed by a professional before you start spending time and money.
2. Taking on Every Customer or Client
Most business owners, especially in the beginning, believe that all business is good business and there is no such thing as a bad customer. This thinking leads them to accept what we call “vampire” customers. These are the customers that demand the most time and use the most resources but are usually the first to ask for a discount in price. Dealing with them typically demoralizes your employees because it is hard to make this kind of customer happy and they are the first to turn into detractors if things don’t go their way.
One step that every business should do is sit down and brainstorm their ideal customer and then target their marketing and prospecting around that profile. This can be done during your business plan or after but you need to ask who do you enjoy working with, what are their needs, and where would you find them. These are the customers that you enjoy serving and are usually the most profitable and should make up the majority of your customer list.
3. Business Owners Believing They Can Do Everything
When you are running a small business you have to wear a lot of hats. You are usually human resources, accounting, marketing, and any other job that needs to be done at that moment. While you may be working in all of these areas, that doesn’t mean you are an expert in any of them. Successful business owners understand what they are good at and where they have shortcomings and they outsource their weak areas to experts so they can focus on what they do best.
4. Focusing on the Wrong Things
There is a concept called the pareto principle that can reliably be applied to a lot of areas of life. The basics behind this principle as it applies to small business is that 80% of your results are coming from 20% of your effort. Taking this one step farther, it means that 80% of what you are doing is not significantly impacting your bottom line and your time could be better spent focusing on the important areas.
A good exercise to try is to spend a week writing down what you do each day and how much time you spend on it. At the end of the week look at each task and ask yourself honestly if that activity paid for itself, if it was something you could have passed off to someone else, or if it was something that even needed done at all. The results may surprise you.
5. Competing on Price
Most small businesses have fallen into the trap of competing on price. This may result in a temporary bump in sales but, unless you are in a commodity business, will end up costing you in the long run. If you are in the service industry, lowering your fees devalues your offering and will result in a client list stacked with price sensitive clients that will jump ship as soon as your competitor lowers their price (see #2). If you are selling a product you probably will not be able to beat Amazon or Walmart on price, you don’t have their buying power.
A much better plan is to add value to what you are currently offering. You have customers and clients that are currently your promoters. They are the ones that send you new business and write you glowing reviews. You need to evaluate what you are doing for them and systematize it. If you are having trouble figuring out what your are doing differently for them, just ask.
6. Not Understanding Costs
If you ask a successful business owner how much it costs to run their business they can probably tell you down to the dollar. They know how many sales they need to make to cover their expenses and break even and what kind of profit margins they can expect for each offering. One common small business mistake is not taking into account all costs.
Let’s say you sell widgets. You probably have an idea of how much each widget costs to buy from your distributor and how much you mark each one up. Do you know how much it costs to store each one before its sold? Each widget on the shelf not only costs you the wholesale price, but each one is also taking up space in your warehouse that you rent or own. There is a power bill each month that heats and lights the warehouse, including the space that widget is taking up. There are labor costs to unload it from the truck and put it on the shelf. All of these need to be taken into account when determining how to price your widget.
While this is not an exhaustive list of common small business mistakes, it includes ones that we see quite often. If you have any questions about any of the items above or just want more information, please contact us.