Small Business Development Center
At Chemeketa Center for Business & Industry
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To Succeed in Business, Know the Risks

By Chemeketa SBDC

To succeed in business, know the risks

You’ve heard the statistics on business failures and how difficult it is for new businesses to survive. According to the U.S. Small Business Administration, 30 percent of new start-ups won’t last the first two years, and by the five-year mark, one-half of all new businesses will be gone.

Why does this happen? And more importantly, how can you prevent this from happening to you? Here are some very common reasons for new business failure.

– Starting up in industries where others are shutting down. Obviously you aren’t launching a business selling typewriters or rotary phones. But many industries are experiencing radical downturns such as the music industry, book stores, printing businesses and many others. You don’t want to be on the back end of changes in consumer demand, technology and other market forces.

– Not paying attention to your numbers. This can include neglect of your books, inattention to what your bookkeeper is doing, going ahead with something without testing assumptions, taking wild guesses about whether there’s demand out there or not.

– Setting prices that are entirely too low. It’s impossible to be the low-cost leader without economies of scale. Don’t play this game! Walmart and other discount stores will eat you up.

– Running a mediocre business to begin with. Customers will not return to a business that treats them poorly, has shoddy merchandise, and is altogether not worth patronizing. If you’re working harder and harder to attract new customers while not having any repeat customers, there’s probably a good reason.

– Underestimating costs. You can easily spend your way right out of business by paying too much for labor, materials and/or overhead. This puts you in a bad position with cash flow, and will doom your operation.

– Growing too rapidly. Sadly, a business that grows too fast is often one growing in haphazard ways, is chronically short of cash, and doesn’t have time to train new employees sufficiently nor implement sane systems. It’s like a car at top speed that will spin out of control and crash.

– Not having an adequate cash cushion. Seasonality, business cycles, unexpected events, huge orders, and economic trends all lead to an unevenness in cash flow. You need a cushion (that you’ve built up in the good times) to help you get through the lean times.

– Having dysfunctional management. This opens a Pandora’s box of misery, turnover, conflict, and unhappiness. Don’t let this happen to you! Pay careful attention to the dynamics of leadership in your business, solicit feedback on a regular basis, and seek help if you’re the one with the problems.

– Not bothering to do any planning. Winging it is a poor strategy, to say the least. Make sure to spend enough time thinking about where the business is going, and what happens along the way. This includes contingency planning for the inevitable sidetracks that life will put you on.

Marcia Bagnall is Director of the Chemeketa Small Business Development Center and instructor of Small Business Management Program . The Small-Business Adviser column is produced by the center and appears each Sunday. Questions can be submitted to SBDC@chemeketa.edu. Visit the SBDC at 626 High Street NE in downtown Salem or call (503) 399-5088.

About Chemeketa SBDC

We provide the tools and environment for small business owners to make great decisions.

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