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Why New Businesses Fail

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Entrepreneurs have much to learn from mistakes – whether their own or those made by others. Though mistakes are a part of life, some can prove impossible for a business to recover from. Here are some of the most serious errors that should be avoided.

1. Neglecting Hidden Fees

Carefully consider both the direct and indirect requirements of your business operations. For instance, office operations require budgeting for utility expenses as well as maintenance and repairs should an emergency arise. Similarly, it’s vital to consider how payments will be conducted. Though permitting credit cards can mean incurring usage fees, studieshave shown that consumers increasingly prefer credit card transactions. Such competing objectives should be included in your financial plan to derive an optimal budget solution.

2. Forgetting Opportunity Costs

Opportunity cost extends not only to productivity lost through individual idleness, but also organizational. In cases where profits could be maximized by allowing growth, budget-conscience managers can actually hinder long-term profit generation by preventing it for fear of the short-term costs. Carefully weigh the opportunity costs of various proposals to make an informed decision about your course of action.

3. Insufficient Cash Reserves

During decreased profit periods, you may need to rely upon your cash reserves in order to make it through the year. Without cash reserves, the amount of time you’ll be able to continue operating can be severely affected. Cash reserves are necessary for survival; in their absence, you’ll always be in danger of collapse. Be sure to ration your reserve and employ it strategically. Spend it heedlessly and you may find it unavailable when you truly need it.

4. Mixing Finances

Failing to establish clear boundaries between your personal and business expenses may allow your personal finances to be targeted in a lawsuit. Moreover, such bookkeeping inadequacies can leave you vulnerable to an Internal Revenue Service audit; IRS 535states that business expenses must be ordinary and necessary. Your justification for a given deduction may be difficult to substantiate if all your finances are muddled together.

5. Pricing Too Low

The impulse is understandable – undercutting competitors’ prices seems like a viable means of attracting customers. But if you’re working hard while only just breaking even, your low pricemay be to blame. Pricing must reflect not only what customers are willing to pay, but the amount of time and money invested on your end. Inaccurate pricing can not only harm your brand, it can lessen your motivation to go on.

Managing a business can be stressful enough without knowing what to expect. By studying the pitfalls of others, you can improve your opportunity for success.

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Xavier Galindo

freelance healthcare copywriter
& content marketing strategist