In 2013, a Forbes article went viral with the headline “Five Reasons 8 Out Of 10 Businesses Fail,” stating that 80% of entrepreneurs who start businesses fail within the first 18 months. Since then, the article has continued to be cited both in other pieces online and used as reasoning for why entrepreneurs should not take the leap.
Let's be clear: this statistic is false.
In reality, the data shows almost the opposite. About 8 in 10 small businesses survive the first year, with about half making it to five years and one-third making it past ten years.
These stats are much more encouraging than the Forbes headline, but still carry a heavy undertone. There are probably very few (if any) entrepreneurs who start businesses and would still be pleased if they failed in five or ten years. The general consensus seems to be that people hope to build the foundation for a company that can be successful for many years to come -- at least, that is the goal.
So, how can entrepreneurs set their business up for success from the start? Here are some common pitfalls to be aware of and strategies you can use to avoid them.
Wrong Motivators
Let's start from the beginning. Why are you starting this business in the first place? Is it to make money? To be your own boss? To eventually sell it off and retire early?
Or, is it because you recognize a problem in the market that you can solve?
While it is perfectly normal (and encouraged) to have big dreams for what you may reap from your business someday, pause to define the motivators guiding you.
It's no secret that entrepreneurship offers significant potential, but if you are using it as a shortcut to “get rich,” it might be time to rethink your priorities. This is one of the quickest ways to set your venture up to fail before it ever begins. The strongest motivators in this case are intrinsic and solutions-focused; throw in some passion for the business, and you are off to a solid start.
Lack of market need or UVP
If you start Googling entrepreneurship-related topics, you will undoubtedly come across some articles with titles like “How to Start a Business with No Money and No Ideas.”
We hope that headline does not apply to you.
For starters, establishing a business in this way probably indicates that you will not be very passionate about the idea. If you went looking to start a business -- any business -- before having the idea, then you did not have the “spark” moment that inspired you to begin in the first place.
That “spark” comes when you recognize a need in the market: a problem consumers face that you can provide a solution for. If the need does not exist, the business cannot thrive. After all, you need people to pay for your product or service in order to operate.
Now, there are some caveats to the idea of “market need.” Let's take socks as an example. Is there a need in the market for socks? Yes. Most people wear them, and therefore many people need them. But don't jump into the sock business just yet -- what is the unique value proposition (UVP) for your company?
If your offering is not original and consumers cannot differentiate you from competitors, then you will have a harder time penetrating the market -- especially in those industries (like socks and other apparel) that are highly saturated.
To avoid running into this issue, define your UVP from the very beginning. Use it on your website, in your sales pitch, and in every marketing campaign. Make sure prospects know why they should buy from you rather than someone else.
Not enough capital
Every entrepreneur's worst nightmare: having a million dollar idea, but no money to get it off the ground. Or, perhaps you have enough to get things started, but quickly blow through your resources and cannot keep operations up and running.
According to a National Small Business Association study, 25% of small business owners say they are not able to obtain the funds they need to operate their business. This can stop a business in its tracks as quickly as an absence of market need.
Whether it was a failure to raise funding from investors, obtain a loan, hold a successful crowdfunding campaign, or to simply generate your own revenue, having a lack of capital can cause your business to die a slow death by limiting your ability to operate critical functions like production, marketing, and more.
Save money where you can, but also ensure you have sufficient funding before diving in. Plan ahead. Don't blow through all of your money before the revenue even starts coming in. Spend smart.
Lack of flexibility
For many entrepreneurs, their business is their baby. They will protect it without fail and do anything and everything to help it grow. This level of dedication is impressive, but it can also blind some to the realities of the market and changing demands from customers.
Flexibility should be a top priority for any business wanting to survive in the long-term.
There are very few industries where adaptability is unnecessary. Realistically, technology will evolve and customer expectations will change. Other businesses will continue adding features or new offerings that force their competitors to keep up. If you are not paying attention to the voice of customer base (and adapting to match their demands), then someone else will -- and they'll take your buyers with them.
While planning for the long-term is (and always will be) a vital piece of successfully operating a business, gone are the days when we could make these plans and expect them to be etched in stone. Jim Joseph says it well in his piece on business flexibility in Entrepreneur: “Sure, planning is a necessity, particularly for long-term vision, positioning and innovation, but just as important is short-term activity. Movement is key, and responsiveness drives movement.”
How do you avoid this pitfall? Keep your business fluid. Listen to your customers and let their demands (and changes in the market) drive your decisions. When something changes in the market, don't drag your feet -- adapt.
Not protecting your brand reputation
Building a brand is no small feat, and maintaining its reputation is even harder. Let's assume for the sake of brevity that you've already established a solid brand for your business, that there is public awareness, and that your team has made a concerted effort to continue building upon the name of your business.
Even if you eventually reach a point where you are “satisfied,” never stop safeguarding your brand reputation.
Whether it be a bad review, a public relations crisis, or competitor attacks, your brand is an invaluable asset that cannot be taken for granted. It can take years of work to build up the name of your business (and the values you wish to have associated with it), and one mishandled event can bring it all crashing down.
Remember, the internet never forgets. Negative reviews have the potential to affect your business for years to come. 22% of consumers will not buy after reading just one negative review. After three negative reviews, that number jumps to 59%. On average, a single negative review can cost you 30 customers.
The same goes for poorly handled PR emergencies. These happen fairly often -- some on a larger scale than others -- but they all lead to negative associations with the respective brand names for years to come (Chipotle, anyone?).
You can protect your brand reputation through intense preparation and authenticity. Identify your crisis team in advance. Get your facts straight before responding to a negative review or coming out with a statement after an event. Be as open and transparent as possible. Finally, always keep your brand promises -- even if it means admitting wrongdoing and apologizing publicly.
Poor accounting controls
No one wants to think about being defrauded, especially by someone supposedly invested in helping your company succeed. Unfortunately, employee embezzlement is a major issue -- especially for small businesses who often do not yet have the proper checks and balances in place.
According to an embezzlement survey by HISCOX, a specialty insurance company, 80 percent of embezzlements occurred at small businesses (defined as those with less than 150 employees) and 30 percent of embezzlements involved a loss of more than $500,000.
That number is even more devastating when we consider that nearly half (49%) of victim organizations do not recover any fraud-related losses.
While it is unusual for most small businesses to start out with a fully functioning accounting department, there are still important accounting controls you can put in place to safeguard the financial security of your company.
For instance, implement a system that ensures all expenses are tracked and recorded automatically as you go. Perform monthly bank reconciliations, preferably with someone other than the person doing the deposits. Restrict access to corporate credit cards and require receipts and detailed invoices for all credit card charges.
There are endless ways to safeguard your business from fraud, but the bottom line is this: don't allow your finances to go unchecked. Put systems in place that demand accountability, and always remain alert.
Poor planning & premature expansion
In order to avoid falling behind, you must always be thinking ahead. The necessity of planning applies to both short- and long-term considerations for small businesses. Insufficient forethought can lead to issues like contradictory communications, a lack of funding due to overspend, or even expanding too quickly.
Entrepreneurs and business owners are forced to make countless decisions each day, but with defined plans and trajectories laid out ahead of time, they are better able to make choices that will be in line with the short- and long-term goals of the business.
Proper planning will help you to remain in control of your company, both in terms of growth and day-to-day operations. No business owner wants to wake up one day and realize that it is too late to pull in the reins on their company.
Don't forget: accelerated growth can be just as dangerous as no growth at all. Plan ahead and define your goals from the very beginning to set yourself up for success.
People problems
When it comes down to it, your business is made up of the people who run it: whether it is just you as a solopreneur or a full C-suite plus 1,000 employees, building a great team is one of the most difficult (and most crucial) tasks for any business.
In a 2018 study by CB Insights, which analyzed over 100 businesses' postmortems to determine the primary reason for startup failure, the third most common reason (behind no market need and lack of cash) was not having the right team.
Some founders and CEOs cited that their issues came from not having a partner to balance them out, while others said their founding team was inadequate. A diverse team with different skill sets was also often cited as being critical to the success of a company.
Hiring the right people to fill the necessary roles is crucial, but the leaders of the business -- those driving the ship -- have more to consider than just their hiring decisions. For instance, what kind of leader do you want to be? A business can fail very quickly if those at the top are creating a toxic environment. This could manifest in many ways, whether it be an inability to delegate or negative relationships between managers and employees.
Also important is for the leaders of the company to surround themselves with the right advisors. Whether it be lawyers, accountants, marketing or technology experts, leaders must recognize their own strengths and find the right people to balance out their weaknesses.
Most entrepreneurs are very careful about their hiring decisions when they first start their business. It is vital to carry this diligence forward through the entire life of the company.
There are plenty of ways that small businesses can fail, but there are also endless opportunities for success. Remember: About 8 in 10 small businesses survive the first year, 50% make it to five years, and one-third make it past ten years.
The pitfalls we outlined above are some of the top reasons businesses fail. If plans are put in place to avoid them from the beginning, then your business has a much higher chance of succeeding compared to the average startup. Plus, think of all the ways entrepreneurship can make you rich beyond the material: fulfillment, freedom, experience, contacts, and so much more.
Operating a business is a long and winding road. Are you set up to thrive in the long-term?
About Frank Jenkins Jr
Frank Jenkins Jr. CPA is the managing partner of Adams, Jenkins & Cheatham, a CPA practice based in Midlothian, VA. Frank specializes in Consulting services, tax planning, audit & assurances. "I genuinely care about our clients because I have a personal connection with them." He is active in the community and belongs to the AICPA and the VSCPA.
