Contrary to a politician’s claim that nine out of ten businesses fail, statistics show that 44% of businesses survive for four years, at the very least. Still, 4.4 shutdowns out of ten is no comfort if you happen to be one of them. But this shouldn’t stop would-be entrepreneurs from trying to start their own small business. They should take it as a challenge to learn about setting up a business that will still be operating successfully years down the road.
Small business owners, whether it’s an online store or a brick and mortar establishment, typically take on all the roles in a business, from doing the menial tasks to sales and marketing to daily operations mainly because of budget constraints. Knowing the mistakes that first-timers and even serial failures in entrepreneurship make will help you spot them and make the necessary moves to avoid committing the same errors.
1. Not Having a Business Plan
A business plan is critical to the success of any business, even if it’s a single proprietorship one. Making one is putting into paper everything that’s in your head in starting your venture. It includes in detail your goals, the business processes, funding sources and financial forecasts, market research and sales strategies and even the number of employees and other seemingly minor features.
Your plan will have an executive summary, a strengths, weaknesses, opportunities and threats (SWOT) analysis and financial forecasts.
Aside from using the plan to attract investors, it is also your personal guide to running the business. Other uses of a business plan are:
- Outline specific action plans of action
- Secure external funding
- Assess prospects and possible opportunities
- Manage cash flow
- Plan exit strategies
2. Not Screening Employees
Pre-employment screening is a basic method to assess or determine a person’s character, honesty and competency for a position. Applicants have been known to lie about their education and experience and, if hired, will lead to company losses and even lawsuits from customers. A background check will show if the applicant is truthful and a criminal records check will allow the business owner to make an informed decision for hiring. A significant purpose for pre-employment screening is to prevent employee fraud, also known as employee theft or embezzlement. Screening should preferably include drug use, credit check, and identity verification in addition to the usual education and employment verifications.
Small organizations have the highest rate of employee fraud at 31.8%, according to the ACFE 2012 Report to the Nations. Aside from actual cash pilfering, cybercrimes are getting more common as businesses use computer systems.
Business owners who catch an employee stealing can fire him or force the person to resign. In either case, go by the books to prevent a lawsuit against you. If you decide to prosecute, consult a competent criminal lawyer with wide experience and full knowledge of the law.
3. Not Implementing Effective Internal Controls
Internal controls include programs that will safeguard your business assets, sound accounting and auditing procedures for accurate financial reporting, information technology programs and systems, and compliance to operational requirements. Another important function of internal controls is prevention and detection of fraud.
Examples of internal controls in small businesses are sequential documentation, batch reconciliation, automated controls in software, validation checks, segregation of duties especially in financing processes, physical controls to use of equipment and petty cash, approval authority levels, and monitoring and review of employee performance.
4. Not Setting the Right Price
Most beginners in entrepreneurship think cheaper prices will ensure the success of their business. Another reason for undercharging is inadequate knowledge of a pricing system. For businesses that deliver services, not correctly logging the hours worked results in lost revenue. For example, you don’t bill a client for a fraction of an hour but you’re paying your employees for that hour. Or you sell merchandise at prices that don’t include the indirect expenses. The fact is, customers are willing to pay more for quality products and services than buy cheap but inferior goods.
To stop undercharging, sit down and do the math, recognize the value of your products and services, and consistently maintain their quality so customers will keep coming back.