The myth that nine out of ten small businesses close in their first year may or may not be completely true. According to more recent Dun and Bradstreet data, 76 percent of new companies were still in business after two years. But since these statistics are based solely on the number of business license applications forfeited, they may not be entirely accurate. Many business owners don’t immediately contact their licensing office; some never do.
Studies show businesses that do survive longer had more cash up front to invest. Other survival factors include the owner‘s age, higher education, and previous experience in their field. The number one cause of small business failure is “lack of planning,” and the most common mistake in planning falls with making poor financial choices right from the start.
Most people believe that to have a successful business you need to start with a large sum of money and acquire those start-up funds by taking risky business loans or mortgaging your home. That’s simply not true. In fact, 25 percent of business owners needed no dollar amount to start up.
Reports show that only 27 percent of business owners have borrowed the money they needed to start their business and 36 percent of owners used their savings for their business start-up. It is always better to save the money you need up front if you are able. A total of 69 percent of new businesses were started or acquired without any need to borrow money.
So if it’s that easy, why do so many businesses fail? It may be that new business owners spend more time planning a vacation than they do their new business venture. Many don’t calculate into the equation how their personal financial responsibilities will be met while their new business is growing legs. They will still have rent or mortgage, electric bills, phone bills, and other household expenses. A new business just can’t support home life for an estimated need of 1-2 years. This is where we fail to plan.
Starting a small business should be looked at as just that, a “small” business. The founder of Dell Computers was a college dropout. Starting small out of his garage, he managed to excel above all of the world’s top computer manufacturers. One in three computers sold today is a Dell.
Just over 32 percent of new business owners needed less than $5,000 to start or acquire their business. Businesses opening without a huge financial debt show a much greater chance for success. If you have a business idea, you need to keep it in proportion to the amount of money you have to pursue it. Instead of building a $400,000 franchise store, you might need to look at buying a $15,000 coffee cart that you can drive around to local events. There’s always a way to work out your idea without exceeding your means.
Successful businesses are started with proper planning. Spend the time needed to plan your business idea and do the research needed to ensure you have all your ducks in a row before you open up the pond for customers.
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