Please ensure Javascript is enabled for purposes of website accessibility

Starting a Small Business? 3 Mistakes to Avoid

By Jason Hall - Aug 21, 2018 at 6:01AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The devil's in the details. But there are also very big things you shouldn't ignore.

Small business is the lifeblood of the U.S. economy, and it's also been the path to financial freedom for millions of people. And with a strong economy, some of the lowest unemployment levels in decades, and a lot of new opportunities for small businesses to thrive, now is a great time to start a new business. 

But starting a business can be much easier than keeping it going. According to recent data, about 80% of new businesses survive their first year, but only about half make it past year five. But your new business doesn't have to be one of those that don't make it, especially if you avoid a few key mistakes. Here are three big mistakes you should make sure to avoid if you want your new business to be a success. 

A black shoe about to step on a banana peel.

Image source: Getty Images.

1. Forgoing a business plan 

A great idea and a strong work ethic are really important to your business' success. But when it comes to navigating many of the pitfalls of running a business, writing and then following a business plan can make all the difference. This is particularly true in the early years when so many companies fail, and often for reasons that may have been avoidable with a business plan. 

If you have a solid business plan, it should mean you've put more consideration into the risks that could sink your business, such as cash flows, generating lower profits than expected, having higher expenses, and a litany of other things. In short, it's not just a playbook on how to run the business, but also should mean you've better planned for potential problems up front. 

Professional woman sitting at her messy desk while holding up a small sign with the word help on it.

Image source: Getty Images.

The reality of starting a small business is that you'll almost assuredly have to wear many different hats to succeed. By having a business plan to help guide your actions and more objectively measure your business' success, you'll not only avoid mistakes you may have never seen coming, but also find it easier to identify opportunities to improve your results. 

2. Underestimating how much cash you'll need

Man in suit lighting $100 bill on fire.

Image source: Getty Images.

This is one of the biggest reasons why so many small businesses fail in their first few years. Most businesses start adding up expenses far ahead of generating a single dollar in sales. A partial list includes the following: 

  • Real estate
  • Equipment and supplies
  • Inventory
  • Insurance and utilities
  • Professional services (legal, financial, etc.)
  • Marketing
  • Employee salary
  • Licenses or permits

But it's not just start-up costs. Depending on what you sell and who your customers are, it may take some time for sales to turn into cash flow, and most businesses go through an early period when expenses outpace revenue. If you don't have access to enough capital in this early stage, you may find yourself with a growing business that fails because you run out of money. 

3. Not knowing your market or customers

Green and red store closing signs on storefront.

Image source: Getty Images.

You may have what feels like a wonderful idea for a new business. But have you made sure that it's actually viable where you intend to operate? The fact is, a great idea won't be a great business if you don't have enough customers. And if you open a business in the wrong place, you may burn through all of your start-up capital before you can relocate. 

And it's not just location. Are you selling the optimal goods or services? Are your prices competitive (or even too low?) Will your sales be sustainable or prove highly seasonal? 

These are all questions that you can get a much better idea about with some market research before spending a single dollar on start-up costs, and could make all the difference between failure and success. 

A little planning can go a long way to business success

While even well-planned, solid business ventures can still fail, you will greatly improve your chances of succeeding with preparation before you launch your business venture. Fortunately, the U.S. Small Business Administration offers a lot of resources completely free of charge, including market data (compliments of the U.S. Census Bureau and other agencies), business planning tools, and access to funding. Local chambers of commerce and other small-business groups can also make for wonderful resources to get your venture up and going. 

Starting a new business can be incredibly difficult, but also very rewarding. You're almost certainly going to make mistakes along the way, but that's OK. As Thomas Edison said, "I have not failed. I've just found 10,000 ways that won't work." Avoid the mistakes you can, and learn from the ones you don't, and use that knowledge to drive your small business to succeed. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/20/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.