Rookie Mistakes: 3 Tips to Prevent First Year Business Failure

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Data compiled by Bloomberg found that eight out of 10 entrepreneurs who start a business fail within the first 18 months. Incompetence to varying degrees is the most common reason cited, while lack of experience comes in second.

All new business ventures comes with inherent financial risk. It’s up to ownership to mitigate these inevitable drawbacks until the company reaches the stage of sustained profitability. These three tips will help you get through those initial 18 months.

Draft a Business Plan

There is no hard data as to how many U.S. startups open with a written business plan. But the Australian Businesswomen’s Network, citing statistics from the National Australian Bank, estimated in 2011 that 40 percent of small businesses had no plan at all. These companies simply opened for business and expected profits to follow. This is a surefire way to reserve your seat on the first-year failure train.

The Small Business Administration recommends drafting a business plan that includes at least three years of financial projections. An executive summary should describe what your business is and how you plan to make it profitable. A mission statement, growth charts and product description should all be part of this section. Keep in mind venture capitalists typically decide whether they’ll invest in a company after reading the first few sentences of this summary.

A detailed description of your product or service, market analysis, organization structure and projections should also be part of this written plan. Your business plan will be a living document that is updated as necessary when goals are reached and projections don’t pan out.  You can use a free step-by-step tool from Futurpreneur to help write your business plan.

Fraud Prevention

A 2000 study published in the academic journal Entrepreneurial Executive found that small businesses are 100 times more likely than large corporations to fail as a result of fraud. The 2012 Global Fraud Study by the Association of Certified Fraud Examiners (ACFE) found that only 19 percent of employees at small companies (those with fewer than 100 employees) received fraud training, compared to 60 percent of those at large companies.

Andi McNeal, Director of Research at the ACFE, concluded that it’s far more cost effective to invest in preventative measures than reacting to something that has already occurred. Formal codes of conduct should be written and distributed to all employees. This is especially important for companies employing bring-your-own-device (BYOD) policies. Make certain to change access credentials to cloud data storage and other sensitive accounts whenever an employee leaves or you intend to terminate.

Cynthia Hetherington, president of consulting firm Hetherington Group, told Business News Daily that external audits should be a regular part of all fraud prevention measures. She also recommends anonymous tip lines for whistle-blowers and mandatory vacation for every employee.

Customers Are Gold

No company can exist without customers, which makes them the most valuable part of your business. The 2010 Customer Experience Impact Report by RightNow Technologies found that 82 percent of consumers stopped doing business with a company after experiencing one poor customer experience. Nearly three-quarters cited rude staff as the problem, while 55 percent said the company failed to resolve their complaint.

The simplest way to improve the customer experience and retain your most precious asset is to employ the old-fashioned CARP method when dealing with complaints. The acronym stands for Control the situation, Acknowledge the problem, Refocus the dialogue and Problem-solve so the customer is satisfied. Make sure to respond to both complaints and compliments left on your social media pages. This shows customers you’ll take time to acknowledge them and that their input matters.

Business failure in the first year is preventable if your goals are realistic and all possible safeguards are put in place. Always treat your employees and customers well—everything else typically falls into place.

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