What You Don't Know Can Hurt You
It takes guts, steely confidence, and a super-human tolerance for risk to go into business.
No one ever starts out believing they’ll fail. Sure, they know it’s possible. They know it happens to others. But they pour their lives and fortunes and futures into their dream anyway because they feel certain that things will be different for them.
And about half of them will be wrong.
The Plain Truth
Here are a couple of sobering facts from the Bureau of Labor Statistics that should make any aspiring entrepreneur break into a cold sweat.
In Minnesota, just more than half (54.1 percent) of the businesses started statewide in 2010 were still around in 2015. Nearly one-fifth (19.4 percent) weren’t around after the first year.
The state’s business failure rate fluctuates a few percent from year to year and can be slightly better or worse than the nation as a whole, but the pattern stays the same. About half the time things end badly.
So, what causes all those companies and all those big dreams to evaporate? Of course, the individual circumstances vary from one business failure to the next, but in the end they tend to have a few things in common:
- A lack of business knowledge and experience
- A lack of thorough preparation
- A lack of capital
And these critical factors are often intertwined.
Experience, Planning, and Money
The foundation for failure is laid early with inadequate understanding or basic research about the chosen industry and target market.
People dive in without knowing enough about their customers, about how to sell in their industry, and about their competitors. And, most important, they don’t know enough about how they’ll actually make money – market pricing and profitability. They think they’ll have more customers and more price flexibility (up or down) than they’ll actually have.
It doesn’t take long for the foundation of assumptions they’ve made to start cracking.
Some of these difficulties might have been avoided – or their severity greatly lessened – with a careful business plan that included a market analysis and financial projections. But many aspiring business owners don’t understand the necessity of a plan, don’t know what it should include, and don’t know where to turn for help.
Obtaining adequate capital can be a problem all its own, but a general lack of business knowledge and planning can have a very negative affect on an aspiring entrepreneur’s ability to secure bank loans, investment and credit.
Without realistic projections of capital needs and anticipated revenues (all grounded in a thorough understanding of an industry), lenders simply do not have the confidence to lend.
Fueled by unrealistic expectations, too many overeager entrepreneurs start businesses on a financial shoestring. They underestimate how much time and cash they’ll need between startup and when they the begin generating adequate revenues or turning a profit. At the same time, they tend to overestimate their ability to attract bank financing.
Out of Order
There’s a lot to know if you’re going to start your business off on the right foot.
Everything begins with understanding that starting a business isn’t a single decision or task. It’s a series of decisions and tasks. And making those decisions and doing those tasks in the right order very often can mean the difference between success and failure.
Hundreds of aspiring entrepreneurs in Minnesota learn this lesson the hard way every day. They learn it after they’ve rented that office space; purchased expensive equipment; invested in inventory; and after they’ve run out of money or are facing needless crisis.
Are you doing the right things (and in the right order) to place your new business on a sound footing? If the answer is “I’m not sure,” then you’ve got some more legwork to do.
Consultants at our Small Business Assistance Office can help you understand more about all the factors you'll need to consider before you start a business. And our network of Small Business Development Centers has experts located in nine main regional offices and several satellite centers statewide.