Many dream of running their own businesses, drawn by the promise of autonomy and potential success. But it’s no secret that starting a new business can be challenging.

Statistically, about 18 percent of new businesses fail within the first two years, and over half don’t survive beyond five years. That’s why it’s critical to plan thoughtfully and stay alert so you don’t fall into common traps that can derail your dreams.

Over the past decade, we’ve helped launch more than 30,000 small businesses — and I’ve seen firsthand the mistakes that new business owners often make.

In a recent piece for Inc., I explored “6 Ways Businesses Can Fail From the Beginning,” highlighting some critical errors entrepreneurs often make right out of the gate. Building on that discussion, this blog will dive deeper, unpacking new business owners’ most frequent challenges and providing strategic insights on navigating these hurdles successfully.

Here are seven common business pitfalls, plus how best to avoid them:

1. Not Having a Plan

Many beginning entrepreneurs overlook having a clear plan. I’m not talking about a complete business plan. Those are typically only necessary when getting bank funding. What you will need, to increase your chances of success, is a solid financial plan and a sales & marketing plan. These detail how you will make and spend cash (financial plan) and grow the business (sales & marketing plan). It doesn’t need to be perfect. Much of it will be wrong. What it provides is a baseline from which you will learn the business and adjust your strategy.

The core of your financial plan will be your cash flow projections. This is especially important for businesses with:

• Significant inventory;
• A large lag between when work is done and when the business gets paid; and/or
• Equipment that needs regular maintenance or replacement.

A cash flow projection tracks the expected revenues coming in, as well as expenses and investments going out on a month-over-month basis. Creating this will force you to clarify the critical financial assumptions that drive the business. This is important because reality will differ from your expectations. With a cash flow projection, you can adjust assumptions as you learn more and see the impacts on the business going forward.

Many new business owners start without projections, which often comes back to bite them. This can lead to overbuying inventory, poor decision-making, and frequent cash shortages. Cash is the heartbeat of your business. Without it, your business stops. Projections give you a view of your future financial health based on your current trajectory.

2. Not Defining a Target Audience

If you don’t know who your customers are, how will you know if your marketing or product efforts will be successful?

Without a clear understanding of who you are serving, your business risks spreading resources too thin, trying to appeal to everyone, and resonating with no one. Knowing your target audience makes it easier to direct your marketing, tap into customer loyalty, and build products that will sell profitably.

How do you find your target audience? There are many ways, but here are a couple. One is to define who you think your ideal customer is and then survey them. Talk to people about your product — whether in person or via social media — to try and understand the problem they need solving. This can confirm you have the right audience or need more work to find the right customer profile.

Second, you could also offer your product or service at a low cost to a few people you believe are ideal customer fits. When we launch new services at Guidant, we typically give early customers a few months for free to work out the kinks and ensure we have the right offering (and customer).

3. Trying to do Everything Yourself

Trying to do everything yourself can lead to burnout, reduced efficiency, and hindered business growth. As a business owner, it’s crucial to recognize the limits of your time and expertise.

Delegating tasks and seeking external help allows a more focused approach to strategic decision-making and core business activities. Leveraging resources, whether hiring employees, outsourcing tasks, or seeking advice from mentors and consultants, can provide fresh perspectives, specialized skills, and increased productivity.

A good tool for deciding what to delegate is to create a matrix with an x-axis (Requires my unique skills & expertise) and the y-axis (Is critical for the business’s success). As much as possible, eliminate the things that aren’t critical for the company’s success. Look to delegate important things that do not require your unique skills and expertise. Then, you can focus your time on the things that are both important and need you most.

4. Insufficient Capital

Insufficient capital can limit your ability to cover startup costs, sustain operations, and invest in growth opportunities. Without adequate funding, your business may struggle to manage cash flow, fulfill customer orders, or respond to market changes effectively.

Sufficient capital is crucial as it provides a financial cushion to help your business navigate through early-stage challenges, invest in necessary resources, and develop a competitive edge.

You are very likely to need more capital than you think. If you want to be built for success, assume your expectations are wrong — and that everything will take twice as long and require twice as much to fund. If you can figure out how you’d survive in that scenario, you will likely succeed.

How do you know if you have enough capital? Use your cash flow projections (#1) to determine how much cash you need. You can also use that financial model to scenario test what would happen if it took longer to reach your revenue expectations or if it costs more to launch the business.

5. Taking on Debt

Debt can zap cash flow over time because debt means payments come out of your monthly cash flow. Managing debt is a delicate balance that needs careful consideration.

On the one hand, taking on debt can help you leverage your cash and give you more dollars upfront to work with. It can even enable you to buy a more significant business. But on the other hand, debt also creates an inescapable cash flow burden. That cash flow burden can inhibit owners from making the investments needed to make the business successful.

The need for accurate cash flow projections becomes even more critical when you take on debt. It’s crucial to avoid a scenario where it seems like you’re making money, but all your income is tied up in covering interest payments instead of being available for business reinvestment.

If you take on debt, model it financially to ensure a manageable debt burden.

You’d also benefit by having a plan of bringing more money into the business if it’s needed to weather a difficult time.

By the nature of our work, many of our clients use the Rollovers for Business Startups (ROBS) method to jumpstart their businesses without incurring debt. This strategy lets them invest their retirement funds from 401(k)s and IRAs directly into their business, bypassing any taxes or penalties.

6. Taking Salary Out of the Business Too Early (Before the Business is Profitable)

Taking a salary too early can create a cash flow problem for the business. At a minimum, you’ll want to model your compensation as part of the business’s financial planning and projections. Delaying a salary until the company generates sufficient profit to cover your compensation is also highly advisable. Most businesses need a certain scale of operations to provide a sustainable income for the owner. Taking cash early could compromise getting to that outcome if it prevents the company from reinvesting in the growth needed to get to scale.

How do you ensure your salary doesn’t jeopardize the business? Reducing your personal expenses before starting a business is a good place to start. Making hard decisions on personal expenses before you become a business owner can help avoid the need to make even harder decisions if the business encounters difficulty. Understand that a lack of discipline in your personal budget will bleed into your business at some point, and plan accordingly.

Another smart move is keeping your day job or running your business as a side gig until it reaches enough scale to pay you a living wage. Limiting the personal financial needs of the business in the first year can have dramatic impacts on how quickly the company can grow and, ultimately, the type of lifestyle it can support for you in the future.

7. Buying Expensive Equipment Early

I’ve seen many new small business owners fall into the trap of purchasing expensive, top-of-the-line equipment early on, assuming that it will immediately enhance their business operations and productivity. This can lead to unnecessary financial strain, as the return on such investments often don’t materialize quickly enough to justify the expense.

In the early stages of a business, conserving capital is crucial to maintaining operational flexibility and resilience. One rule of thumb is that buying used in the early stages of your business is almost always better than buying new.

Say you’re in a mobile dog grooming business, and you need vans. In the dog grooming business, you can expect those vans to be destroyed within six months. If you buy all new vans, what happens six months later? Not only did you eat up a ton of cash, but you’ve likely lost a ton of equity in those vehicle assets because you won’t be able to sell them for anything near what you paid.

Another common pitfall is buying more equipment or inventory than needed to take advantage of discounts. Avoid this temptation whenever possible. It’s better to pay more for equipment or inventory when assured of success than to gamble your cash flexibility when the outcomes aren’t as predictable.

Summary

While the failure numbers may seem daunting for aspiring business owners, you can avoid many risks with awareness, planning, and intentionality of effort. Avoiding these seven pitfalls can dramatically increase your chances of success and preserve your dreams of creating the life you want through business ownership.

Read my article on Inc. for a look at the six critical ways businesses can fail from the start.

Ready to take the next step toward business ownership? Guidant Financial is here to help. We specialize in Rollovers for Business Startups (ROBS) and innovative funding solutions to get your small business off the ground. Start your journey today with a trusted partner by your side — let’s turn your business dreams into reality.

Call us today at 425-289-3200 for a free, no-pressure business consultation to get started — or pre-qualify in minutes for business financing now!

Jeremy Ames is the Co-Founder and CEO of Guidant Financial, a company that has helped launch of over 30,000 small businesses since 2003. Jeremy’s experience as a business owner spans both franchises and start-ups. He has owned three franchise businesses across the real estate, personal services, and wellness sectors and also founded or co-founded five other businesses, including ventures in the media and business services industries. He is a staunch advocate for small business ownership, believing it to be the best route to personal and financial independence.