A great idea is only one part of what makes a business successful.
From not researching your market to not vetting or training your employees, there are plenty of pitfalls small business owners can make that could be easily avoided with a little knowledge and preparation.
Here are seven common missteps to avoid in your small business.
1. Not performing market research.
Making sure customers want your product or service enough to pay for it is an important piece of initial market research. So is having what you’re selling priced at a profitable point, and one that doesn’t price you out of the market.
The Small Business Administration (SBA) says low sales is one of the top reasons a small business closes. That’s why they recommend conducting market research before starting a small business by looking at the following factors:
Demand: Is there a desire for your product or service?Market size: How many people would be interested in your offering?Economic indicators: What is the income range and employment rate?Location: Where do your customers live, and where can your business reach?Market saturation: How many similar options are already available to consumers?Pricing: What do potential customers pay for these alternatives?
It is also important, once your business has been established, to continually look into each of these areas to ensure that your product and services portfolio continues to be relevant and profitable.
2. Not preparing for a cash flow crunch.
Many small businesses face cash flow problems at some point in their early stages. In fact, WePay reported in May 2017 that 41 percent of businesses had experienced cash flow issues in the past year and 16 percent had experienced payment fraud.
Projecting when a cash flow disruption might happen and making sure you have access to funds, or enough in reserve, can be difficult. That’s why the nonprofit SCORE has a variety of free financial templates for small businesses, including a cash flow budget worksheet.
3. Not securing financing before you need it.
Even if you start with personal funds and cash from friends and family, sooner or later you probably will need additional funds.
While 57 percent of new businesses used personal savings, according to the SBA, 73 percent of small firms used outside financing. The key to securing financing is planning ahead.
There are a variety of options including:
short-term loans
medium-term loans
short-term line of credit
medium-term lines of credit
SBA loans
equipment financing
invoice financing
crowdfunding
personal credit cards
4. Not having a website.
It seems almost unthinkable, but according to a Clutch business research survey, 29 percent of all small businesses in the U.S. still don’t have websites. And in the Midwest, 42 percent of small businesses still don’t have websites.
5. Not hiring the right team for your culture.
Hiring employees with the right skillsets is important, but so is finding employees who fit with your company’s culture. Look for their passion for the industry, not just their interest in the position. Ask open-ended questions to get a sense of how they think, versus how they respond, especially if your company rewards creativity and problem-solving skills.
Some companies will have perspective employees do a “test run” before an official hire is made to help the job candidate and company decide if the fit is right. For example, why not try 30-days of contract work with a potential new employee before making them full time? Just be sure to check your local employment laws beforehand.
6. Not understanding your creditworthiness as a business.
Unlike your personal credit score which tends to be based on the same financial information across providers, there isn’t one single business credit score methodology that covers everything for lenders.
For example, Dun and Bradstreet rates businesses via a viability rating, a supplier evaluation risk rating, a delinquency predictor score, a financial stress score, a D&B rating and its most well-known Paydex score.
The Paydex score looks at your payment history for the past two years and rates your company. Scores range from 1 to 100 based on your promptness to pay bills.
A score of 80 to 100 is good. The reason, if you score an 80 it means you promptly paid your bills on time. Anything higher means you pay your bills before the payment was due. And, a score lower than 80 indicates a late payment.
Business credit scores help pinpoint your company’s creditworthiness by looking at how much credit your business has used, type of customers, and if you pay your bills on time.
There are plenty of other factors and systems including Equifax Small Business, which doesn’t give a single score, Experian’s Intelliscore Plus and FICO Small Business Scoring Service.
The better your scores, the better the lending rates and your borrowing power may be. Concerned about your company’s credit score? Here are some ways to start improving your business credit score.
7. Not learning the basics of accounting.
Most entrepreneurs don’t start a company because they love accounting. But without some basic skills, it can be hard to keep track of what is going on financially. Even if you offload everything to a bookkeeper, you still need to understand how to read financial statements, and understand what income statements and balance sheets are saying.
Thanks to mobile technology, business owners now have a variety of accounting apps designed for businesses that provide easy ways to understand your business’s finances and to keep on top of accounting.