6 Common and Devastating Mistakes New Business Owners Make That You Should Avoid

According to the Small Business Administration, 33% of businesses fail in the first two years of operation, 50% fail by year five, and only 33% make it to year ten. Nothing you can do will lower your chances of failure to zero, but there are a lot of common mistakes new businesses make that really hurt their chances. Luckily, there’s no such thing as a failure because you can always be held up as a bad example.

Shockingly, almost all of the most common mistakes made by new business owners are easily identified and solved by taking the time to go through the process of writing a business plan.

How to Tell When Your Business Is Failing

Getting a business off the ground is tough. So how do you know the difference between a slow start and failure? It’s a question all new business owners wrestle with. Here are the tell tale signs it may be time to hang it up:

  • You’re unable able to service your business debt
  • You’re unable to pay suppliers.
  • You’re losing clients.

But let’s avoid that, ok? Pay attention to the following list of big mistakes entrepreneurs make early on, and increase your chances of success.

Financing Failures

Financial blunders bring down companies every day. Here are a few of the easiest to make:

  • Not paying payroll taxes on time. This is really a bookkeeping problem, but is one of the most common tax problems that bring young businesses down.
  • Pricing your product too low. New businesses often feel pressured to price themselves to undercut the competition. The problem is that once you do it’s hard to go back.
  • Co-mingling business and personal funds. Open a business account immediately. Form an LLC. Keep all of your business spending separate from your personal funds.

Structural Failures

You can always operate as a sole proprietor. As long as you maintain proper business licenses and carry all required insurance, you don’t have to create a separate legal structure for your business. But considering how inexpensive and easy it is to create an LLC, it’s kind of weird not to. LLCs provide substantial liability protection against your personal assets while adding minimal taxation requirements or bureaucracy. Read about all your options. When you’re ready to move, read our reviews of our favorite business formation services.

Market Analysis Failures

New business owners often fail to identify and pursue a target market. This problem and many others are prevented by forcing yourself to write a good business plan. Just assuming that your product or service will find an audience is a big mistake. Conduct a market analysis and identify the people most likely to support your business. Read our Business Plan Guide for full details on how to do it.

Asset Purchase Failures

In an attempt to minimize debt, many a business owner has used a windfall revenue event to purchase an asset for their business, only to leave themselves cash starved of operating cash. Instead of using your operating cash to purchase assets, use a collateralized business loan to purchase them. A time honored technique is to make the terms of a business loan equal to or less than the number of service years you can expect to get from the asset.

Bureaucracy Failures

Hyper focusing on your product or service while avoiding the necessary other components of running a business (like marketing and sales) is a very common mistake.

In the 1998 classic, Field of Dreams, a benevolent voice whispered to Kevin Costner, “If you build it, they will come.” And they did, but that was actually terrible business advice. You can’t just put your head down and only focus on your product or service. To succeed you must have a solid business plan. You must understand your business structure, pay attention to your bookkeeping, and commit energy to a robust marketing plan.

Bookkeeping Failures

Bookkeeping takes time and is easy to put off. Until tax day comes, that is. Many a new business has been brought down by the tax ramifications of failing to properly keep track of how much money has been made and from who, and how much money has been spent and on what. If you’re trying to save by not hiring a bookkeeper when you start, then avoid these most common bookkeeping errors:

  • not saving small receipts
  • not tracking reimbursables
  • improperly classifying employees
  • not communicating with your bookkeeper
  • not deducting sales tax
  • mis-categorizing expenses
  • Doing your own bookkeeping yourself