business mistusiness bankruptcy filings fell 24 percent in 2013, the American Bankruptcy Institute reported. Unfortunately, one reason was many companies feared they could not afford the expense of filing, according to SSG Capital Advisors bankruptcy expert Teresa Kohl. Kohl foresees an increase in business failure in 2014 if interest rates rise.
At the same time, the NFIB’s Small Business Optimism Index shows businesses struggle with tax and regulatory burdens, high inventory, and low sales. NFIB chief economist Bill Dunkelberg projects that midterm campaign demands for minimum wage hikes will further depress the economy in 2014, barring an unforeseen surge in economic activity. Rather than counting on macroeconomic luck to get them through the coming year, small business owners are better advised to review the mistakes of 2013 in order to avoid repeating them this year.
The biggest cause of small business failure in 2013 was poor marketing, a University of Tennessee study found. Two problem areas were pricing strategy and advertising waste. Both problems reflect a failure to test the market. JC Penney CEO Ron Johnson committed this blunder on a colossal scale by arbitrarily insisting on eliminating coupons and sales without testing how shoppers would react. The strategy sent company stock plunging from $42 to $14 and sent Johnson looking for a new job. Similarly, small business owners tend to set prices and buy ads based on what they think will sell instead of first testing what people will buy. The smart strategy is to test-market prices and ad campaigns on a small scale instead of spending big bucks on promotions that may not turn a profit.
Lack of Experience
Lack of experience is generally the top reason for small business failure, according to popular business textbook author Dr. Michael Ames. Ames finds this problem particularly acute in the area of leadership experience. If business owners lack the expertise to handle aspects of their business, he advises they should invest in hiring skilled staff instead of trying to do it themselves.
Poor Financial Management
Small businesses frequently suffer from widespread financial management mistakes, according to a 2013 NFIB Research Foundation survey of 400 accountants. The most common failures include not updating financial records, not preparing a budget, not talking to financial consultants regularly outside of tax season, and not developing tax strategies. One solution experts recommend is routinely posting financial data to a cloud-based accounting system. Automated payroll systems such as those provided by Intuit merchant services can similarly help alleviate problems stemming from poor financial record-keeping.
According to Facebook global director of engineering Andrew Bosworth, the most frequent mistake tech start-ups make is trying to reinvent the wheel by creating technology that already exists. In any industry, innovating without exploring proven precedents is a waste of time and money. When there’s an established procedure or tool for performing a routine task, the shortcut to success is modeling industry best practices. Innovation is good for opening up new markets, but there’s no profit to be made rediscovering beaten paths.