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Small businesses are invaluable to the U.S. economy. They create a substantial amount of jobs, foster economic diversity and drive innovation. Based on this statistic,1 in 5 businesses do not succeed in the first year. While those odds may seem intimidating, business should keep in mind of these top 12 common reasons to be aware of that can be pitfalls to small businesses.
1. Lack of capital or funding
Startup and operational costs are going to be the first, most likely largest hurdle for most entrepreneurs. Without sufficient funding, a business might not be unable to maintain inventory, invest in marketing, or manage cash flow fluctuations. And all of that can lead to more operational challenges. And without adequate capital, the business won’t be able to deal with unexpected expenses (which always seem to happen, right?).
What to consider: Thorough financial planning, including realistic budgeting and cash flow projections can help an entrepreneur understand true funding requirements. Dogged research will help you get real numbers rather than hopeful guesses. A capital buffer helps, too. Think about exploring diverse sources such as loans, investors, grants, or crowdfunding for financial protection. Keep strict control of expenses, prioritize essential spending, and have a contingency plan for financial downturns.
2. Cash flow problems
Cash flow problems can directly affect the company’s ability to meet its immediate financial obligations. Without adequate cash on hand, a business may struggle to pay for essential expenses like inventory, rent, utilities, or employee salaries.
This can lead to a cascade of negative consequences, such as the inability to deliver products or services to customers. In turn, this can harm the business’s reputation and lead to a loss of sales. Persistent cash flow issues might also prevent the business from investing in growth opportunities, ultimately stifling its potential.
What to consider: a small business should:
- Diligently monitor its cash flow by using detailed budgets and financial forecasts to help anticipate and plan for periods of tight liquidity.
- Implement invoicing and collections processes to help ensure timely payments from customers.
- Maintain a reserve of cash to help cover unexpected expenses or emergencies.
- Consider other financing options.
3. Bad management team
Have you ever had a bad manager and noticed how it affected the business as a whole? Poor decision-making, inefficient processes and bad communication are some of the most common outcomes of poor management. This can result in a decline in product or service quality, a drop in customer satisfaction, and low employee morale. That last item could result in poor performance and/or the loss of talented employees. Ultimately, it can sabotage a company from the inside out.
What to consider: Prioritize hiring skilled managers who align with the company's vision and core values. Think about hiring for “culture add” vs. "culture fit"—that is, hiring someone who would bring something new to your management team rather than someone who "matches the vibe" of your existing team. After hiring, continuous training and development programs can also enhance management skills. Implement a clear accountability structure with measurable goals to help gauge whether managers are aligned with the business's objectives.
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