According to the Small Business Administration, about one-third of startups will not survive their first year.
There are several reasons – from under-capitalization to over-estimation of a product’s demand to pricing issues – but they all tend to have one thing in common: the proper expectations were not set from the beginning. If an entrepreneur wants to increase their chances of success they need to successfully predict a number of different factors. Here are a few to consider:
Cost of Goods
A budding entrepreneur will often fall victim to the belief that if it costs $10 in raw materials to make a widget then they have determined their cost of goods sold.
Unfortunately, many entrepreneurs will neglect to include labor costs, energy costs, wear and tear on manufacturing equipment and other intangible costs. Even if the entrepreneur is providing their own labor, it is important that they value their time. If they are able to make $10 an hour working, and it takes an hour to make one widget, the perceived cost should be calculated as $20 per hour if accounting for no other costs. Inputs from electricity to replacing the drill that is used to screw the widget together must be considered to determine if the widget can be produced for a profit.
Understanding and accounting for the nontraditional costs will allow the entrepreneur to make a more informed decision as to if this enterprise and his endeavor is worthwhile.
Understanding that while someone may be able to make a widget for $10 and market it for $20, actually selling a product or service to a consumer can be a real challenge.
While the internet has allowed small businesses the ability to appeal to a global marketplace it has also become so large that standing out amongst your competition is very challenging. A successful business person understands that a consumer may not actually recognize they have a need for their product. If they are already buying a widget for $25 they may not realize that a new and improved widget made by their company is available. Educating consumers, finding retailers and setting up online sales platforms all take time and resources.
An entrepreneur who recognizes that it may be some time until the first widgets are sold is in a much better place than one that simply believes that “if you build it, they will come.”
Finding Good Help
A good friend is a great thing to have, but usually good friends do not make good employees.
A startup may feel they need to lean on the generosity of friends and family while gearing up to make their first batch of widgets, but that does not mean that hiring that person is the best choice in the long run. Temp services, the local newspaper and career websites are available to an entrepreneur, but the quality of an employee is hard to determine in an hour long interview. A new employee who expects to work only weekdays is going to be a challenge when a rush order for widgets arrives on a Friday afternoon and the entrepreneur has to ask the employee to work the weekend. Setting expectations about a potential employee’s appearance, punctuality, pay and a host of other issues is very important for a successful company to understand early in the process.
A rigorous hiring process may not be the easiest path, but it is one that will help to avoid issues in the future.
Randy Steele is a lifelong entrepreneur with track records in the financial service business, real estate, real estate appraising, greenhouse growing operations, and the mortgage industry. Through these experiences, the knowledge he has gained is invaluable to someone wanting to start a business or someone wanting to take their business to the next level. He is the author of “The Entrepreneur’s Roadmap to Success.”