Six mistakes to avoid when starting a business

Around 60% of new businesses fail within three years, says David Prosser. Here, he outlines six key pitfalls to avoid when starting a business.

Woman giving a business presentation
Managing a team is a different skill to setting up a business
(Image credit: © Getty Images)

New business launches are soaring despite the tough economic backdrop. Companies House says 402,000 new businesses were registered in the first half of 2022: more than 90 start-ups were founded every hour between January and June.

Still, while the total marks an 18% year-on-year increase, how many of them will succeed? Around 20% of businesses fail during their first year – and 60% disappear within three years of launch. Those percentages may be even higher in future owing to soaring inflation and slowing growth.

However, forewarned is forearmed. Business advisers point to several common mistakes to avoid when starting a business. By cutting out those errors from the start, you will give your new venture a better chance of success.

1. Have a detailed plan for your new business
Mistake number one is not to have a business plan. Failed businesses frequently haven’t spent time developing a clear roadmap for how they will achieve their objectives and what that might require in terms of resources.

Your business plan should be detailed, with clear targets for sales, costs, marketing campaigns and so on. And it should set out what you’ll aim to do over the next 12 months at least, even if the plan has to be updated as market circumstances change.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

2. The importance of cash flow
A second common error is not to understand cash flow. To make a profit, your business clearly has to make sales that exceed its costs. But you also need to think about when money is coming in and out of the business. Costs tend to fall due upfront and may be particularly high in your firm’s early days. Sales revenues, by contrast, may not come in until weeks or months later. Managing your business’s finances to address this mismatch is vital.

3. Research your market
Thirdly, don’t stint on your market research. It’s tempting to launch a business on the basis of merely an instinct that there will be demand for your product or service, but doing so will increase your chances of disappointment. Spend some time identifying the size of the customer base you are targeting, as well as its willingness to spend money on what you’re offering. Look at whether competitors are already meeting that demand. If so, do you have a unique selling point?

4. Ensure you have the right skills
Problem four is that running a business requires a broad range of skills that entrepreneurs may not have. Business founders often have vision – they’re creative and innovative. But businesses also need sound management, which requires a more mundane skill set.

Are you financially literate enough to manage the accounts? Are you organised enough to keep operations flowing smoothly? Do you have the confidence to manage a team? All these skills can be acquired through hiring, but it is crucial to identify shortfalls up front.

5. Keep growth in check
A fifth hallmark of business failures is that they have tried to grow too fast. It is exciting to launch a business and see the orders come flooding in, but you need the right structures in place to manage growth.

The danger is that the business gets overstretched, fails to deliver to customers it has made promises to – or delivers shoddy work. That can ruin your reputation before the company has really got going. Turn down orders from customers you’re not confident you can service instead of simply trying to wing it.

6. Make a back-up plan
The final problem is lacking a backup plan. Even in benign economic times, businesses are buffeted by unexpected surprises – anything from the failure of a key supplier to a fire in the warehouse. Unless you have contingency plans for coping with a major problem, and a financial cushion to fall back on, such a setback could sink your business, even if it is otherwise successful.

David Prosser
Business Columnist

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.