Owning a small business has its advantages and disadvantages. Each entrepreneur must weigh the pros and the cons carefully and decide whether or not the risk is worth the reward.
In addition, small businesses havecertain advantages over large businesses. Flexibility, generally lean staffing, and the ability to develop close relationships with customers are among the key benefits of small businesses. The digital communication revolution has significantly lowered the cost of reaching customers, and this has been a boon to small startups and big businesses alike.
As the little boy said when he got off his first roller-coaster ride, “I like the ups but not the downs!” Here are some of the downsides to owninga small business:
Time commitment. When someone opens a small business, it’s likely, at least in the beginning, that they will have few employees. This leaves all of the duties and responsibilities to the owner. Small-business owners report working more than eightyhours a week handling everything from purchasing to banking to advertising. This time commitment can place a strain on family and friends and add to the stress of launching a new business venture.
Risk. Even if the business has been structured to minimize the risk and liability to the owner, risk can’tbe completelyeliminated. For instance, if an individual leaves a secure job to follow an entrepreneurial dream and the business fails, this financial setback can be hard to overcome. Beyond financial risk, entrepreneurs need to consider the risk from product liability, employee disagreements, and regulatory requirements
Uncertainty. Even though the business may be successful at the start, external factors such as downturns in the economy, new competitors entering the marketplace, or shifts in consumer demand may stall the businesses growth. Even entrepreneurs who go through a comprehensive planning process will never be able to anticipate all of the potential changes in the business environment.
Financial commitment. Even the smallest of business ventures requires a certain amount of capital to start. For many people starting small businesses, their initial source of funding is personal savings, investments, or retirement funds. Committing these types of funds to a business venture makesthem unavailable for personal or family needs. In most caseswhere a small business receives start-up funding through a loan, the entrepreneur must secure the loan by pledging personal assets, such as ahome. Riskingthe equity in one’s home is a financial commitment not all entrepreneurs are willing to make.
In spite of thepotential disadvantages, most small-business owners are pleased with their decision to start a business. A survey conducted by the Wall Street Journal and Cicco and Associates Inc. indicates that small-business owners and top-level corporate executives agree overwhelmingly that small-business owners “are more satisfied with their work than their corporate executive counterparts.”[1]
Why Some Ventures Fail
Valuable Lessons
The odds are definitely stacked against small business owners and would-be entrepreneurs. According to the Small Business Administration (SBA), “About half of all new establishments survive five years or more and about one-third survive 10 years or more. As one would expect, the probability of survival increases with a firm’s age. Survival rates have changed little over time.” [2] That’s why it’s so important to understand how and where things go wrong—such informationoffers valuable lessons on what to avoid. There are six main causes of small business startup failure:
Lack of Planning
Starting a business without planning where you want to go is like starting a car journey with no idea of your final destination or a map to get there; you’re bound to get lost. To avoid this mistake, set a clear goal of where you want to be and how you planto get there.
Failureto Delegate
Within every business someone needs to focuson the bigger picture and have an overview of everything happening internally and externally around the company. That person should be you, butif youryour head is buried in the accounts, you won’t. So delegate and outsource all the tasks that can be done by others, and free yourself to concentrateon the bigger picture.
Unwillingness to Change
As a small business you can’tafford to stand stillwhile your market and the world around you movesforward. Adapt and develop your small business so it’s forward-thinking and innovative, not behind the times.
Forgetting That Cash Is King
A small business needs to monitor itscash flow closely. As soon as it loses trackof the money, it’s vulnerableto failure. Plot and analyze your incomings and outgoings to make sure your small business stays on the right financial track. Don’t expect massive profits from the outset, but don’t accept a loss, either.
Lack of Objective Targets
Failing tomeasure the success of campaigns, products, or services can be disastrous for a small business. Is that PR campaign you’rerunning really worth the money? Does Twitter really bring traffic to your Web site? Know what to measure, and you’ll know how successful you are.
Failure to Askthe Right Questions
When you’re a small-business start-up, knowing which questions (and whom) to ask is difficult. There are numerous resources, such as the SBA, local economic development agencies, and chambers of commerce, that are great places to start. Part of the process is “knowing what you don’t know,” and such organizationscanhelp you figure that out.
Whileavoiding these pitfalls won’t guarantee small-business success, knowing what not to do can help you to be proactive and focus on the things you should do.
Important Considerations
The entrepreneur’s challenge is to balance decisiveness with caution—to be a person capable of seizing an opportunity but also one who has done enough preparatory work to be well informed and not assume unnecessary risk. Preparatory work includes evaluating the market opportunity, developing the product or service, preparing a good business plan, figuring out how much capital is needed, and making arrangements to obtain that capital.
Economists have analyzed a range of entrepreneurial successes and failures and identified key issuesfor up-and-coming business owners to consider carefully ahead of time. Taking them into account can reduce risk; ignoring them can contributeto failure. If you’re considering entrepreneurship, ask yourself the followingquestions to make sure you’re thinking about the key business decisions:
Motivation: What is yourincentive for starting a business? Is it money alone? Are you prepared to spend the time and money needed to get yourbusiness started? True, many entrepreneurs acquiregreat wealth. However, money is almost always tight in the start-up and early phases of a new business. Many entrepreneurs don’t even take a salary until they can do so and still leave the firm with a positive cash flow.
Strategy: What products or services will yourbusiness provide? What differentiates yourbusiness idea and the products or services you will provide from others in the market? Who is yourideal customer? Who is yourcompetition? Is the plan to compete solely on the basis of selling price? Price is important, but most economists agree that it’s extremely risky to compete on price alone. Large firms that produce huge quantities have the advantage in lowering costs.It’s also important to decide how you plan to manage and advertise your business.
Realistic vision: What kind of business do you want, and how much will it cost to get started? Will you need a loan? Is there a realistic vision of the enterprise’s potential? How long will it take to make yourproduct or service available? How long until you start making a profit? Insufficient operating funds are the cause of many business failures. Entrepreneurs often underestimate start-up costs and overestimate sales revenues in their business plans. Some analysts advise adding 50 percent to final cost estimates and reducing sales projections. Only then can the entrepreneur examine cash-flow projections and decide if he or she is ready to launch a new business.
Other Key Decisions and Planning
Experts can help with many decisions on financing, taxes, insurance, location analysis, or supplier relationships. Some bankers and insurance agents will give advice at nocharge to encourage a relationship. There are even experts to help with planning itself!
There is no right or wrong wayto answer these questions or do the planning. Rather, the answers and approach will be based on each entrepreneur’s judgment. An entrepreneur gathers as much information and advice as possible before making these and other crucial decisions.
Check Your Understanding
Answer the question(s) below to see how well you understand the topics covered above. This short quiz does not count toward your grade in the class, and you can retake it an unlimited number of times.
Use this quiz to check your understanding and decide whether to (1) study the previous section further or (2) move on to the next section.
