Lack of experience running a business causes small-business owners to make avoidable mistakes common to thousands of entrepreneurs. These problems often have nothing to do with the company’s product but result from financial, distribution and management challenges. Using expert advice from sources such as the U.S. Small Business Association, you can identify common problems new businesses face and take steps to address them before they happen to you.
Inappropriate Distribution Methods
Businesses have a wide variety of methods for distributing their products and services, including brick-and-mortar stores, online sales portals, catalogs, direct-response advertising, wholesalers, distributors, sales companies and direct mail. Don’t fall into the trap of picking distribution methods based only on their ability to deliver the highest unit sales. Analyze the costs to use each distribution method and your profit margins per unit to determine which methods provide the best return on your investment. Additionally, avoid relying on only two or three big customers or distribution channels to keep your business afloat. If you lose one or two of them, you might be out of business before you can react.
Poor Cash Flow
Profitable small businesses with good sales can still struggle if they don’t time their cash flow correctly. Cash flow refers to the timing of your receivables and payables. Small businesses without large cash operating reserves or lines of credit often struggle even when sales are good because they can’t pay their bills. This occurs when invoices arrive from vendors and suppliers but payments from customers aren’t expected for 30 to 90 days. Make sure you create an annual cash flow statement that projects when you will have bills to pay and when you will receive your income.
Lack of Long-Term Strategy
Small businesses that don’t operate using a business plan and three- to five-year strategies can become reactive, miss opportunities and be unable to respond to new changes in the marketplace, such as a new competitor or technology. Small-business owners should have strategies to grow their businesses through refined distribution plans, demand forecasting, diversification, debt management and human resources strategies. A small business without an organization chart, for example, might start hiring incorrectly, promoting the wrong people or leaving key positions unfilled. Relying on only one supplier can put you at that vendor’s mercy when it comes to the price you pay and when your supplies are delivered.
Lack of Operating Funds
The U.S. Small Business Administration cites insufficient capital as one of the main reasons small companies fail. This includes not only cash reserves but also access to credit. Don’t wait until you need credit to apply for a loan or credit card. Keep your credit reports accurate and try to raise your credit score so you can get loans when you need them. Set a cash reserve goal and stick to it, resisting the temptation to spend excess capital on new marketing, employees or physical assets. Poor accounting systems can deprive you of vital financial information, so keep a current balance sheet, ask for monthly receivables and payables-aging reports, monitor your cash flow statements, conduct budget variance analyses each quarter and analyze your debt each month.