Chapter 1 of “20 Directives for Small Business Success: Do or Die”

Directive #1 Avoid These Common Mistakes

“We cannot solve our problems with the same thinking we used to create them.”
Albert Einstein

The Small Business Administration reported that, 80% of all small businesses fail within the first year and 95% fail within the first 5 years. There are many reasons these businesses are not successful, therefore, I conducted a good review of these reasons and the results of the study should be very valuable to you, the adventurous entrepreneur. Understanding what can happen initially is helpful as you are on your journey to business success. Avoid these pitfalls and help to ensure that you make your mark in the business world. Many studies have been conducted to isolate the particular elements that have contributed to the failure of thousands of small businesses and I have attempted to distill and simplify the major findings. CB (ChubbyBrain) Insights has a collection, 166 Start-up Failure Post-Mortems”. It’s a definitive collection of business startups and the circumstances revealing explicit reasons for their failures. After reviewing the research, I have identified 15 of the most prominent reasons small businesses fail. Most of the enterprises explored here were able to acquire substantial amounts of revenue to infuse into their new businesses but they still failed. No matter what level of funding you begin with, the following mistakes can happen in any new business and will eventually ruin it. A careful understanding of these situations will increase your business wisdom.

1. The owners weren’t true to their original Vision.
Determining a Vision for your business identifies a future goal to achieve and a guide for your actions. In reality, it’s extremely easy to become distracted from your Vision by day to day activities and just life in general. If you find yourself distracted, it’s like driving an airplane without a specific destination.

Example: The A company was a business organized to provide business attire to professional women. The Vision was to actually custom tailor suits, jackets, pants and skirts for a perfect fit. The business was located in a strong business district and provided access to a large number of working women. Once people began to notice the business, many assumed they could bring clothing there to be altered and since the owner and his partners thought it would only take a little of their time and bring in revenue, they decided to take in a few alterations. Of course, they did a great job on the alterations and left little time to develop the custom tailoring Vision. Alterations and small jobs for theater costumes took up all the time and provided enough income to support the business with small profits. This continued for years and the business never became what it was meant to be. After several years of struggling to make a profit, the doors were closed.

2. More money went out than came in.
This is also referred to as “burn” and is a common problem for new businesses. The funds are not matched with the operations and the use of the funds is not controlled. It’s important to set up reliable funds management Systems either with an accountant, efficient software or other available money management services to make sure the money is tightly controlled.

Example: The B company was a business designed to provide home cleaning services to homes in a large residential area where both heads of household worked outside of the home. The business became popular quickly and the founder was swamped with orders. He found it necessary to hire two people to help him provide the services. After about four months of operation, with orders continuing to increase, he learned at the end of that month, that he was not able to make the payroll. He had spent money on supplies, gas and other operating expenses without an adequate accounting system in place. He was not able to secure additional funds, so he scaled back as the only one working in the business and never grew to the great business he hoped for.

3. The business was well into operations before creating a strategic plan.
This happens sometimes when the initial idea is so exciting to the founder, affiliates and investors that it seems nothing can go wrong. They end up with a reactive strategy rather than a proactive strategy. Reactive leadership always stays behind and eventually fails.

Example: The C company was a financial services operation designed to assist large businesses with finance administration. The founders and affiliates were excited about their idea and their enthusiasm spread to investors. They were able to acquire several million dollars to start the enterprise, and planned to design a strategy en route. They attended technical conferences, built project teams, and bought supplies and equipment. They spent the money fast so there wasn’t enough remaining capital to create the strategic plan. They needed to perform fast and couldn’t because they hadn’t designed operational systems for customer acquisition and management, product management or finances. They weren’t set up to respond in a timely manner. As a result of these deficiencies they were forced to close the business.

4. The founder didn’t have enough money to sustain operation.
This one is related to not understanding the complexity of the operations of a business. Entrepreneurial excitement can lead you to think you can begin a business with limited initial funds because you’ll generate funds quickly. It almost never works that way. Sometimes it takes a while just to create an awareness of your business. Customers sometimes follow much later.

Example: The A company had this problem also. Their Mission was to provide custom attire for the professional women in the area. The owners didn’t research the real operational procedures and cost of those procedures before launching the business. Custom businesses require expensive machines and experienced tailors. Each of these components are expensive to acquire and sustain; the time to set up and design systems was great; and the financial requirements were also much greater than the owners had anticipated. The original Mission could not become a reality and the business survived for a short time on anything that would bring in revenue.

5. The founder didn’t understand the complexity of the product/service delivery.
The excitement of your ideas and the feelings they bring are enticing. All you see is success, because to you, your business will not fail. You haven’t taken the time to do the thorough research required for success. You just can’t wait to jump in! So basically, you don’t have any idea of the work involved.

Example: The E company was able to obtain extensive funding but they found that steering the ship, handling all of the engineering, manufacturing, marketing, and retailing, even when they were taking small profits, was ultimately too involved for them and required more players, especially in comparison to other startups in their discipline. The founder learned about other startups in their discipline that used the internet to build their business and were doing quite well. He decided that what he had previously planned to do and how he had planned to do it was too complicated. He reported in his final statement, “The reason why the X company makes a ton of money is they don’t have to do anything but put up a website,” (adapted from “146 Startup Failure Post-Mortems” by CB Insights.)

6. It took a long period of time for the market to accept the product or service.
Sometimes it takes time just to create an awareness of your business. In some situations, customers need to learn about the benefits and become convinced they need your product or service. Customer acceptance may take a long time.

Example: The F company was designed to provide unique costume jewelry to students and young women in a popular college town. The owners didn’t research the real operating procedures, costs of the operations or marketing requirements before they launched the business. Each of these components were expensive to acquire and sustain; the time to set up and design Systems was greater than expected; and the financial and time requirements for marketing were also much greater than the owners had anticipated. They needed to promote their business in many areas of the town just to let the customers know that they were open for business. Basically, they didn’t allocate enough money for the marketing required; therefore knowledge of the existence of the shop didn’t reach enough potential customers. Consequently, the original Mission couldn’t become a reality and the business survived for a short time and eventually failed.

7. The founders made marketing assumptions about customers.
Unfortunately, many new business owners make assumptions about how their business will grow. One of the most reoccurring mistakes is not really understanding your target customers. It’s easy to think they think like you think, but that’s seldom the case. There are many areas where assumptions should be checked when building a business.

Example: The H company was a retail shop for high-end women’s clothing. The founders assumed the customers would love their clothing and tell all their friends. They assumed referrals would grow their business. This didn’t happen. The shoppers wanted to keep this great resource to themselves so they wouldn’t see their friends in the same clothes. They had high numbers of customers in the beginning, but couldn’t keep up the momentum. The referral system didn’t work as they expected. They had repeat customers but very few new customers. The owners didn’t invest in a new marketing strategy and eventually failed.

8. The founders didn’t consider possible lawsuits.
According to Glen Curtis in “Don’t Get Sued: 5 Tips to Protect Your Small Business” business owners should avoid shady or unethical dealings; hire a good lawyer. Avoid organizing as a “sole proprietorship” (protect your personal assets); obtain liability insurance and protect your files with backups. These are just a few examples. Of course you should be thoroughly knowledgeable about the licenses and regulations required of your industry.

Example: The I company was a software provider that obtained significant financing and was doing quite well in a business organized for three years. An organization in the business of finding ways to sue good businesses, forced the I company to make a huge settlement for a facetious lawsuit concerning software patents.

9. The founders didn’t find out whether or not the customers would accept their product or service.
This is similar to reasons #7 but different because it relates to customer acceptance. It is critically important to determine if customers really like, will use or buy your product. Many small business owners can see the value of their product/service but haven’t tested the potential customer base to see if it is something they might want.

Example: The J company was an alternative banking source for people without bank accounts. The initial idea was exciting to the founders and their investors because they thought there was a big market for the service they offered, but the entrepreneurs had it all wrong. They started the business and intended to run the business until they found a market fit. The money ran out before they found that fit. Their eyes were on scaling the business more than finding a market fit. Of course, this didn’t work and the venture ended.

10. The entrepreneurs used bad hiring and on boarding practices.
Bad hiring practices can lead to low production, lost customers, lost sales, bad products and failed business. It’s also deadly to morale and requires you to go through the time consuming and costly hiring process again.

Example: The K company was a technology enterprise that offered state-of-the-art accessories for computers. They were ahead of the market and kept that lead for four years. They hired two people to fill critical positions as they began scaling their business. The founders relied on their feelings about the candidates and how they would fit in the business. They used very few objective measures. They immediately put the new hires to work without an on boarding process or a coaching period. They assumed the candidates’ impressive experience would allow them to just go in and do what was expected of them. It didn’t work out that way. Each person did what he or she wanted to do. No established systems were followed. Production was slow and customers were irritated and took their business somewhere else. The scaling failed and the business lost too much money and had to close it’s doors.

11. The founders didn’t use data to it’s best advantage.
Business owners of today have a full array of data gathering software to help them meet their goals. You can gather data analysis for marketing, sales, finances, human resources as well as the technical parts of your business. It helps you make informed decisions when guiding your business to sustainability and growth.

Example: The L company was a business cleaning operation organized to serve businesses in their large city. The owners perceived there would be many jobs for them to perform. They built a workforce, with venture capital, of 20 workers without enough information. They didn’t consult the data about their industry in the area and they didn’t project the finances they would need to sustain the workforce as well as the cost of machinery and maintenance. They quickly burned through the money for salaries and equipment with very little work obtained so the business had to close its doors.

12. The founders didn’t pay enough attention to the business processes.
It’s important to design operational processes before you actually begin doing business. In most cases, you’ll need to improve and make changes as you go but it’s important to begin with systems for all of your operations.

Example: The K company as referred to before, had poor hiring practices and poor on boarding practices, but they also neglected to design operational systems for their business; therefore, the new hires did things the way they wanted to do them rather than adopting the successful operations that had allowed the K company to grow to the size it achieved. They didn’t document their processes or train the new workers toward their working operations.

13. The founders were afraid of the lousy economy and chose not to innovate.
The founders began with a noble and exciting Vision, but the daily requirements and the concern for money led them to focus on maintaining the status which kept them from looking toward the future needs of their customers. Fear kept them from becoming creative.

Example: Company L was a company designed to build new apps for smart phones. They had some exciting plans and good venture capital and their first five apps were successful. The founders began focusing on news of the faltering economy and decided to stay with the apps they had and just try to improve them along the way. Other app developers were working on the same class of apps and developed new ones that made the L company apps obsolete. Recognizing they were too far behind, they were forced to close the doors of their business.

14. The founders decided to scale too early.
Rapid market acceptance and growing numbers of customers can be exciting but difficult to manage. When this happens to new business owners, many think it is immediately time to scale up even though they haven’t made the right preparations. This problem was examined by Carol Roth in “The Biggest Problems Facing Small Business (and Solutions)”.

Example: Company M was a company designed to offer formal wear and costume rentals in an area full of potential customers. They immediately saw the potential and hired four extra workers. While scaling the business, they spent a lot of money on advertising, decorations and trips to trade shows. They hadn’t counted the cost of scaling up or designed a safe process for scaling up. They “shot from the hip”, ran out of operating money and their business quickly went down.

15. The founders didn’t control money waste.
At times, new owners don’t take time to really consider the benefit of their purchases. They don’t tie their expenditures to the business objectives. Primarily they don’t keep up with the efficiency of what they are paying for. They may use utilities lavishly, keep excess inventory or hold on to incompetent workers.

Example: Company N was a media company dedicated to offering new services to the social media industry. Acceptance was great in the beginning and it appeared that they were going in the right direction until they decided to add an innovation. The revenue supported the innovation but the actual reserves weren’t there. After close scrutiny, they found areas of waste and overspending in several of their operations and couldn’t get additional funding to grow or maintain the business.

Of course, there are many other reasons businesses fail. I’ve listed some of the most frequently described reasons. You’ve probably heard of businesses that experienced these situations. The sad thing is, many of them experienced more than one of the mismanagement situations and suffered loss and humiliation as the result. In this Age of Information, there’s no reason new businesses have to make these mistakes. Simple directions for better business management are available to everyone. All it takes is a little time to learn about the best management practices that lead to success. Keep up to date concerning these practices. Keep up to date in your particular technical area and religiously apply what you have learned.

Recipe for Avoiding Common Mistakes

Directive #1
Step 1. Be true to your original Vision.
Step 2. Tightly control your money.
Step 3. Create a strategic plan.
Step 4. Make sure you have sufficient funds to begin operations.
Step 5. Understand the complexity of your business.
Step 6. Test for customer acceptance.
Step 7. Make good marketing assumptions.
Step 8. Take adequate steps to avoid lawsuits.
Step 9. Ask your customers what they need from you.
Step 10.Use good hiring and on boarding practices.
Step 11. Use all data available when making big decisions.
Step 12. Design operational processes.
Step 13. Innovate in spite of the economy.
Step 14. Scale when conditions are right.

“Smart people learn from their mistakes. But the real sharp ones learn from the mistakes of others.” ― Brandon Mull, Fablehaven