While 80% of small businesses make it through year one, roughly half don't make it to their five-year anniversary. Those are pretty grim odds, but the reality is that many of those failures can be predicted long before they happen. Too many people launch companies because they have a dream, not because they have proper funding, a solid business plan, and the operational skill to make things work.

That's understandable. When you have a vision, or just a strong belief in yourself, it can be easy to ignore the potential red flags.

So, to give your potential company a better shot at not becoming one of those early failures, start by asking yourself the tough questions before you open for business, and be willing to make changes -- or even walk away -- if you don't like the answers.

Two men talk in a workshop in front of a laptop.

Use logic not emotion when you consider opening a small business. Image source: Getty Images.

1. Is there a real demand for what I'm offering?

Just because you love knitting, fishing, or any other hobby, that doesn't mean the market where you are will support a business with that focus. Examine the market where you plan to operate, and see how it compares to other places where businesses similar to the one you're considering run successfully.

Consider the degree to which the internet will be providing you with competition. Will you be selling things that can be purchased cheaper online? How do other players in the space attract and keep customers? Can you honestly expect to do the same? What are the differentiating factors that will bring customers to you, rather than to one of your competitors?

Be willing to make changes to your plan if you discover strategies and tactics that are working elsewhere. For example, if you open your dream knitting supply store, maybe you'll be will served to give the business an educational and membership component. Understand that customers may say price doesn't matter, but in most cases, it does -- unless you provide them with something of value beyond just the goods sold.

2. Do you have the expertise to run the business?

Most small businesses launch with limited personnel -- and sometimes, that means a staff of one: the owner/operator. In such cases, it's on you to know how to handle most aspects of your business. You may not have all the answers, but at the very least, you'll need to know where to find them when you don't.

Even if you have some expertise in the core subject matter your operation will be based on, that's likely to be an entirely different knowledge set than the one required to run a small business. If you don't have those operational skills, you can get them, but you shouldn't schedule your grand opening until you do.

3. Do you have enough money?

When you write a business plan, do an honest assessment of what your expenses will be, and start from a pessimistic forecast on revenue. Assume more money will go out than you expect to spend, and plan for less money to come in than you're hoping for. Don't forget to factor in the cost of advertising -- customers almost certainly won't just show up on their own, at least not at first -- and plan for a few unexpected expenses.

How much of a cushion you'll need varies based on the type of small business you plan to operate, but you should be prepared to lose money through at least your first year of operation. Expect setbacks such as delays in opening, or bad weather that wipes out sales. Perhaps none of those things will go wrong -- in that case, you'll have some extra operating capital on hand that you don't need. But being too optimistic could lead to you going out of business.

Be skeptical

Don't let the desire to be your own boss or follow your dreams blind you to reality. If your answers to any of the questions above are shaky, the time to shore things up is now. Make corrections, gain skills, or save up more money. Be realistic, and know what you're getting into before you commit to opening your small business.

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