Fifty percent of new small businesses fail within five years. That statistic has held steady for so long, it might lead you to conclude that business is a game of chance and success is as random as the outcome of a coin flip.
That's not the case. With research and preparation, you can push your odds of a successful launch well above 50/50.
1) Do your market research.
Too many entrepreneurs think with their hearts instead of their heads. Just because you love to do something doesn't mean people will pay for your product or service in sufficient numbers for you to turn your avocation into a vocation.
So before you quit your job and sink your life savings into pursuing your passion for cupcakes and baking, you'd better figure out how many people would be inclined to buy your cupcakes, how much they'd be willing to pay, and whether you can bake your cupcakes cheaply enough at scale to turn a profit. If the numbers work, then go for it. If not — and you need to be brutally honest with yourself — then don't quit your day job.
2) Be sure your business will have legs.
Even if your research shows there's a sufficient market to support your business today, you have to determine whether that market will still be robust tomorrow. For instance, during a booming economy, you could very well have a great first year if you launch a business that specializes in the sale of big-ticket luxury items. But if the economy goes south in a year, you could find yourself consulting that new law firm in the neighborhood that specializes in bankruptcies. (Not that launching a law firm that specializes in bankruptcies during lean times is a great idea, either: When the economy takes an uptick, those bankruptcy attorneys could have themselves as clients.)
Also, be sure your market isn't too narrow. If you launch a small business whose sole purpose is to supply the parts a particular manufacturer needs to build a specific widget, what will you do if that manufacturer discontinues that widget?
3) Determine whether you can secure enough cash for the long run.
How much money will it take for your small business to open its doors? That's an important question, obviously, for any new business. But it's not the only one.
There are important follow-up questions, too, and unfortunately not enough entrepreneurs think to ask them. What are your terms, for example, and will you be able to meet them? If you don't expect to collect accounts receivable until 180 days from launch, how will you pay your employees during those first six months? (If you don't plan on having any employees during those six months, can you do everything that needs to be done without spreading yourself too thin?) And what if your suppliers include Fortune 500 companies that expect 90-day terms? Also, what if your entire pricing structure is based on beating your competitor by 2% … and your competitor responds to your launch by cutting their prices by 5%? Do you have enough cash on hand to hunker down for a protracted price war? Do the economics of your business even work if you see price compression?
Do Your Research
When it comes down to it, insufficient cash is the reason for every business failure. At some point you realize you don't have enough cash coming in to cover all of your obligations. That's why it's critical to determine the amount of capital it will require not just to open the doors, but also to keep them open until your startup becomes established.