Avoid These Mistakes When Starting a Small Business

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Rookie Mistakes New Business Owners Make

According to Entrepreneur magazine, 20% of new businesses fail in the first year of operation, 30% fail in the second year, and 50% fail in the first five years.

Probably something you didn’t want to hear. I don’t blame you. You don’t start a business for a 50/50 chance of success. No one wants to fail, and no one wants to put in their heart and soul into a project that ends up failing.

It’s important to understand the risks of starting a business. It’s also important to know the mistakes rookie business owners make so you can avoid them.

This article provides some important points to avoid when starting your business. In addition to my points, I’ll provide various resources from other authors giving you a 360-degree perspective into the mistakes new business owners must avoid.

What You Should Avoid When Starting a Business

Misunderstand Your Market and Target Audience

Not understanding the people you’re targeting is a big mistake. By focusing on a target market, you can highlight the most important issues appealing to your target audience.

Say you’re offering home renovation services. Would you try and market your service to everyone? Would you target high school students? Not likely they don’t have homes.

You would do better to target homeowners that live in an area with homes that are over 35 years old.

Next, you need to find out more about the people that own older homes. What are their main concerns? Is it safety, comfort, or do they want to update and maintain their home? Once you find out the number one reason, you tailor your marketing and services to address your customer’s needs.

File for the Incorrect Legal Structure

The setup of your business is important. There are different structures, including a sole proprietorship, an LLC, a corporation, etc.

Each has pros and cons and depending on your plans, for example, you have partners, which will all affect what type of company to form.

Choosing the wrong type of legal structure affects your liabilities and your financial well-being. For More on this topic, see How to Register Your Business Using These Resources

Doing Everything Yourself

When starting, you may have to do all of the jobs yourself until your business is open and gaining traction. There are times when you try and do everything yourself. Problems may occur because either you are not qualified, don’t have enough time, or can’t be in two places simultaneously.

Do what you can, and don’t spread yourself too thin. Fill the positions that are required to streamline operations.

Not Using The Advice of Qualified People

I’m the type of person that likes to figure things out for myself. Over the years, I have learned it’s best to get advice from qualified and experienced people. I don’t know everything, and trying to figure out everything for myself can be a waste of time and effort.

Partnering With the Wrong People

If you team up with the wrong people, it will be a problem. I heard a saying once that resonated with me, “It’s easier to get into something than it is to get out of it.”

When looking for partners, you want people you can work with, have similar views and bring something to the table to benefit the business.

Partnerships have their problems, and most of the problems come from the partners.

It’s important to set expectations, roles, exit strategies, responsibilities, voting rights, etc., before signing contracts with partners or investors.

Failing To Use Contracts

In the old days, a verbal agreement was good enough to make a deal, which was as good as any contract. Today business is a lot more complicated. Without a contract, people easily get out of agreements. It may not be a trust issue but rather a miscommunication.

A contract allows you to set clear terms and expectations, especially when dealing with many details. It is best to have a written contract, so both parties can access, understand, and review the terms.

Running a Business Without a Budget

To keep a business going, you need operating money. You can rarely open a business and depend on its revenue for your operating expenses. In time, you will be able to do that, but you need operating money to survive as a startup during the early stages.

Opening your doors without having an operating budget is a dangerous way of running a new business.

Spending Money in the Wrong Places

As a startup, it’s very important to use your funds cautiously. You may need more money during the early stages of operation.

Let’s look at an example. You have $150,000 of startup capital. It costs you $135,000 to open your doors, leaving you with $15,000.

Instead of keeping that money in an emergency fund, You go out and buy a state-of-the-art office desk and furniture, a high-end printer, a big-screen TV, and a high-end computer. You’re the boss now, and you should have the best of the best. You have an image to maintain, right?

The problem is you spent your $15,000 on your office, and next week you’re going to need that money to restock your shelves because you offer 30 days credit to your customers. You don’t have the cash reserves to restock. Your office expenditure could have waited.

The way you spend money, in the beginning, can put you out of business very quickly, or it can keep your doors open.

Paying Yourself the Wrong Salary

To be able to work full time in your business, you’ll need to draw a salary. If not, how can you keep up with your living expenses?

You’ll have to deal with the stress of making the business successful and deal with the stress of keeping up with your bills. Therefore you’re better off employing yourself and getting a regular paycheck.

On the other hand, you don’t want to take a salary that’s so big it brings your business down because all the money is going towards your salary.

Find a happy medium. Consider the cost of hiring a manager and pay yourself a similar pay rate. Find a rate that allows you to pay your living expenses and work full time without putting a strain on the business.

Undervaluing Your Product or Service

Not believing in your product or service is a huge mistake. When you don’t believe in what you’re doing and what your business offers, you’re going to run into problems.

You won’t be able to promote your products and services, and with any customer complaints, you won’t defend your products and services because you don’t believe in them.

Find the reason. If it has something to do with quality, either upgrade the quality or find a different product. You’re better off offering products and services you believe in and can make you proud.

It could be a confidence issue. You may believe your product isn’t as good as the competition. If that’s the case, you can see what the competition has to offer. Then you can judge whether or not your products are good enough compared to the competition.

Launching Your Business Too Quickly

Launching a business too quickly can be a mess. You may have an influx of customers that you weren’t expecting, and you won’t be able to serve them properly. In a case like this, you have left a bad impression on your first-time customers.

I remember a story where a brand new fast food restaurant opened next to an established one. During the grand opening, the established restaurant put up a sign reading; We are closed today so you can support our new neighbor.

The new restaurant was overwhelmed with customers. The food was undercooked. The orders were all mixed up and delayed. The grand opening turned out to be a failure. Instead of gaining customers and introducing themselves to the community, they lost credibility.

Focusing on Everything

Focussing on too many things at once will keep you from doing anything well. You have heard the old saying, “jack of all trades, master of none.”

When you’re focused on too many things at once, you won’t effectively attend to the important issues that need your full attention.

Avoiding the Bookkeeping Process

Avoiding your bookkeeping process can grow into a big problem. The longer you put off organizing and updating your receipts, the harder it will be to remember each purchase.

Depending on the size of your business, you may need to attend to the books daily or weekly.

A new small business will have many receipts to organize because you’re purchasing equipment, supplies, products, etc. Once your business is up and running, you may be able to handle the bookkeeping on your own and only spend a small amount of time.

The key to bookkeeping success is accuracy and organization. Keep your receipts so you can easily access them when needed. Make notes on the back of the receipt so that you’ll be able to answer any questions related to that purchase during tax time.

You can also do part of the work. The process can be as simple as organizing your receipts and submitting them to your bookkeeper or taking care of the bookkeeping and having your accountant review and file your taxes.

There are many ways to deal with bookkeeping. It’s an essential task, and as a business, you need to submit and verify records when required. Failing to do so will not only keep you in the dark with your finances. It will be a total disaster if the IRS asks questions and you don’t have answers and receipts.

One more crucial idea about being involved in the bookkeeping process is you are always aware of your spending and revenue. If you avoid the bookkeeping process, you may wake up and find you’re out of money.

Whether you do the books yourself or have an accountant, make sure you get consistent reports giving you a summary of your finances, so you don’t get any surprises.

Hiring the Wrong People

On average, let’s say it’s around $30,000 a year to hire an employee for an entry-level position. If you make a mistake by hiring the wrong person and keep that person on your payroll, you have just lost $30,000.

When you look at it from the yearly cost, during the hiring process, you can ask yourself, “Am I willing to invest $30,000 in this person? ”

It’s always easier to hire someone than it is to fire them. Your main objective when hiring is getting the right person for the right job. For more see How and When to Hire a New Employee

Overpromising and Under-Delivering

Overpromising and under-delivering is the key to ruining your business’s reputation, especially in a service-related business.

Sure, you want the business, and you may overpromise to persuade a customer, but it can come back to bite you.

I think a better approach is to underpromise and over-deliver. Then you’re always exceeding the expectations of your customer. Customers that have their expectations exceeded can become customers for life, and that’s something you want.

What Are the Common Mistakes That First Time Entrepreneurs Must Avoid

Falling in Love With an Idea That Nobody Wants

At times entrepreneurs create a product or service and fall in love with it. They spend months and sometimes years developing their product. The problem with this is that they didn’t do any market research to see if people want what they have to offer.

If nobody wants what you have to offer, you don’t have a business and don’t have a product. Business can be difficult, and it can be very simple; find out what people want and give it to them.

Not Using The Support of Others

Failing to understand that there is help out there for whatever you are doing can keep you from completing your work. If you know there is support and don’t use it, then that’s on you. You don’t have to reinvent the wheel.

Get the information and support you need from others. Life is all about people assisting other people directly or indirectly.

You can’t do much by yourself. You always depend on other people; most of it is indirect. When your lights are on in your home, there are people in the background working, so you have that service.

Your fuel, road maintenance, banking, food supply, internet access, etc., are examples of people working in the background. When you consider this approach, you realize you can’t do much on your own. You have the indirect backing of thousands of people each and every day.

Starting a Business To Get Away From a Job

Some people hate their jobs so much that they look for a business opportunity to change their lifestyle.

It should be the other way around. You should be looking to start a business opportunity because you’re passionate about that business idea. You should be running towards your passion instead of running away from your job.

From experience, I can tell you, having a job is a lot less stressful than running a business.

When you have a job, especially one that is not in management, you do your job, put in your hours. When you come home, you can relax. You don’t have to worry about anything work-related.

When you’re running a business, you’re the one in charge. You’re always working, and you’re always thinking about your business. You really have no time off, so maybe think twice if you’re just running away from a job.

Not Preparing for the Lifestyle Changes.

Some people get into business without the full understanding of how it will affect their lifestyle. People often think that owning a business allows them to do what they want anytime. Money comes rolling in. They can live the “high life,” and all their financial worries have suddenly disappeared.

Living the above may be the case in 10 or 15 years when your business is highly successful and bringing in sales in the hundreds of thousands. As a startup, it won’t work that way at all.

You have to put in a lot of time, effort, and strategy to make your business work. You don’t have a lot of time off. You’re always working, you’re always thinking about the business, and there’s no going home at five. You have to take care of the pressing issues whether it’s 5 PM or not.

Failing To Adapt To Change

Change is a part of doing business. Some businesses must adapt to change frequently, and others not so much. The market fluctuates, and when that happens, your business has to adapt.

Failing to adapt to change can sometimes put you out of business. Some examples include:

  • You may have a new competitor.
  • The economy might decline, and you have to make adjustments to keep your sales volumes up.
  • You lost a supplier, and you have to find a new one.
  • You Lose a key employee.
  • You have a supply shortage.
  • Etc.

There are always changes in a business. If you can’t adapt to change, you will find you will end up with problems. Get in the habit of dealing with change because there’s nothing stable about running a business.

Spending Money in the Wrong Places

One of the downfalls of a new business owner is their inexperience with money management. They may not have the experience to create an emergency fund.

They may be spending their money in places that aren’t productive, and there’s no return on that investment. There’s no room for expenses that have no return in the early stages of starting and running a business.

When you’re dealing with your funds, consider it a client’s budget. Every cent you spend, you have to explain where you spent it and why. Putting yourself in this type of mindset will keep you from spending where it shouldn’t be spent in the first place.

Not Setting SMART Goals

A smart goal refers to using the word “SMART” as an acronym to outline a simple plan that can help you understand and achieve a goal.

S – Specific

If your goal is vague, you’ll get vague results or no results at all.

M – Measurable

Your goal must be measurable. If there is no way to measure your progress, you won’t know how you’re doing or if you reached your goal.

A – Achievable

Your goal must be something that you can achieve. What’s the use of setting a goal that you know you can’t accomplish? You’re setting yourself up for failure. Sure, when setting goals, you need to stretch yourself to grow, but don’t set a target that you can’t reach. Think of setting a goal like climbing a flight of stairs. In order to reach the top, you have to take several small and achievable steps towards your goal, rather than overexerting yourself from the beginning and losing momentum and perspective.

R – Realistic

Your goal needs to be realistic. Let’s look at an exaggerated example, someone that isn’t an astronaut has no experience in the space program may set a goal like; I want to be the first person to set foot on Mars. A goal like that isn’t possible in this day and age, and it’s not realistic, so why set a goal that’s not practical? Someone setting a goal like that failed before they started.

T – Timely

When you have a time frame for achieving your goal, you have set a target. When you have a target, you are more likely to reach it simply because it’s set. Without a target, you have no sense of urgency. Someday I’ll cut my expense. Someday I’ll write a business plan and someday may never come. It’s good practice to set a deadline for all your goals.

Goals go hand-in-hand with success. Setting a goal is something you want with the steps to achieve it along with a timeline. For best results, set up smart goals. A smart goal is set up in sections to ensure you have thought about each step and designed how you will achieve it.

Don’t be afraid to set goals. Some people won’t set goals because of the fear of failing. If this is the case, your goal can always change.

Sometimes when working towards a long-term goal, you may get halfway and find you no longer have the need or desire to accomplish it. You may decide to stop, and that’s ok. Other times information and circumstances change, and you can modify your goal as needed.

Here’s an important point to remember. Goal setting is for you. The goal is not in charge of you, and you are in charge of the goal.

What’s the First Thing To Do When Starting a Business?

The First Thing To Do When Starting a Business is preparation. Nothing comes before planning. There are three important areas where I would set my focus.

Area One: Define the Reasons for Starting a Business

You must identify why you want to get into a business of your own? Are you following a passion or running from a job? It would be best if you got into a business for the right reason. If you’re trying to get away from a job you hate, you might not find the lifestyle you’re looking for just because you start a new business.

Running a business takes hard work and determination; get into it because you’re passionate about what you want to do. See Reasons To Start a Business: Here Are Top Ones To Consider for more.

Area Number Two: Research and Due Diligence

Before You take any steps to start your business, you must do your research. You need to make sure people want what you have to offer, and there is an upward trend. There is no use in offering products and services that have a decline in demand.

You also want to research your location. Locating in an area where there is little demand won’t help you. If you locate in an area where there is too much competition, it will be difficult for you to succeed.

The more effort you put into your research, the more clarity you’ll have as to what you can expect. You’ll also have a better understanding of the risks your taking.

Area Three: Write a Business Plan

Even though you won’t have all the answers to the questions needed to complete a business plan at this point, it is a good idea to start writing one. The purpose of creating a business plan at this point will introduce you to the issues you’ll come across when starting and running your business.

Writing a business plan takes time, a lot of thinking, and research. It’s not something you can finish in one afternoon because there are issues to think about, and there are sections you have to research.

Take your time when writing your business plan, and you’ll have a good starting point when your plan is complete.


That’s it for this post. There are hundreds of articles on this topic. You can dive deeper into this topic and receive multiple perspectives. In that case, I encourage you to look a the unique collection of articles I have included in the resource section below.

There’s a lot to go through in one session, so you come back anytime you want to go through the information.


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