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Running head: STARTING A SMALL BUSINESS 1

STARTING A SMALL BUSINESS 9

Difficulties-of-Starting-a-Small-Business

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Difficulties-of-Starting-a-Small-Business

Small businesses play a significant role in the US economy. As the society grapples with rising income inequality and persistent poverty, small businesses represent an important opportunity for addressing these issues. The difficulties of starting a small business are a major obstacle in unlocking the benefits of these economic entities. Organizations such as the United States Small Business Administration exist for the main purpose of helping entrepreneurs to overcome the hurdles of starting a small business and are a testament of the challenges of starting such ventures. The United States Small Business Administration (2014) defined a small business as a firm with fewer than 500 employees. This work draws upon relevant literature to understand the difficulties of starting a small business with the aim of providing insights into the challenges that entrepreneurs face as they start new ventures. The major difficulties of starting a small business include poor planning, lack of sufficient capital, regulatory challenges, and lack of experience or knowledge in the area of interest.

Poor Planning

Poor planning is a significant hurdle in starting a small business. Planning involves creating a specific set of actions that if executed achieve a specific goal (Bonham, 2008, p. 78). When starting a small business, planning involves such activities as conducting market research and understanding the competition, estimating startup and operating costs, and determining the sources of income for the business. A business plan represents the blueprint for the new business as noted by case study help. This tool is important when starting a small business because it helps in raising the capital required and serves as a roadmap for the business. A business plan can also help to establish whether the idea behind the proposed small business is viable before any significant resources are expended.

The common saying “failing to plan is planning to fail” underscores the risks of poor planning for new small businesses. Poor planning denies the entrepreneur and investors the benefits of planning identified above. The entrepreneur might fail to find enough funding for the business in the absence of a sound business plan. The new small business might also falter due to a lack of clear goals and direction. According to Butler (2014), good planning provides new ventures with a mechanism for assessing and monitoring progress and using the insights to take corrective action (p. 209). Poor planning, in contrast, leads to difficulties in measuring progress due to a lack of specific standards or targets.

Financial forecasting is a challenge when starting a small business. According to Longenecker, Moore, Petty and Palich (2008, p. 221), typical small business entrepreneurs and their teams know little about financial forecasting, rendering their planning inadequate. Forecasting requires making informed estimates about the expected costs and revenues of the venture for a reporting period in future. This aspect of planning for a small business venture provides important insights into whether the venture is viable. Forecasting includes estimates on sales and gives an idea on the nature and size of demand for the product or service that the new small business intends to offer the market. The difficulties involved in forecasting make this tool less common among small businesses than large businesses. Unlike small businesses, large businesses have the resources necessary to undertake forecasting activities frequently. Such activities may be undertaken by a marketing or finance and accounting function. A small business venture lacks the resources to hire and maintain separate, fully-staffed finance and accounting departments. For the new small business, such functions are likely to be combined into manageable and affordable units. This limitation suggests that a small business venture does not have the ideal conditions for developing and refining financial forecasts for the entity. Entrepreneurs can overcome this limitation by outsourcing some of these activities to firms that serve small businesses and instead focus on core business activities.

Effective planning increases the chances of success for the proposed business because it prepares the new entity to anticipate threats to the business. The business environment is uncertain, and all businesses face risks to their operations. Effective planning represents a major way for small businesses to mitigate risks to their operations. A small business startup might make the wrong decisions regarding the location of the business or product among other decisions (Visit case study help in Canada). Effective planning ensures that such risks are anticipated and mitigated. For example, the business might relocate to a new location identified as an alternative in the plan or, in the case of an ineffective product, make the right adjustments. Planning, therefore, enables small businesses to be responsive to the changing environment.

Lack of Capital

Lack of capital is a major inhibitor of starting a new small business. Sufficient capital is necessary to ensure the launch succeeds and the business continues to operate as expected after the launch. According to Root (2006, p. 80), some entrepreneurs focus on the immediate capital needs for the launch, failing to obtain sufficient operational capital to maintain the business until it can generate enough funds to cover the expenses in normal operations. Insufficient capital implies the new small business may experience disruptions to its operations from time to time. Suppliers, for instance, may stop supplying materials or products that are critical for the operations of the new business.

Lack of capital implies rigidity on the part of the new entity. Sufficient capital enables new ventures to respond to change and adapt their operations to fit the changing environment. A small business startup founder may notice a change in the business environment since the time of conception of the idea. The change may render the initial plan obsolete and require a new direction for the entity. Inadequate capital limits the ability of the entrepreneur to adjust the new business to reflect new developments. The founder may opt to stick with the initial plan despite the new scenario, rendering the startup a high-risk venture.

One of the key issues regarding capital that arise when starting a new small business involves the sources. There are various sources of capital for small business startups. Personal savings represent one of the first sources that entrepreneurs consider, but this source of capital may not be sufficient. Other sources include friends and family, venture capitalists, angel investors, and small business investment companies. Each of these sources has its own benefits and drawbacks. Funding from friends and family might depend on the nature of the relationships the entrepreneur has with the individuals and the financial situation of the latter. Venture capitalists represent investment companies or groups and invest in the business to gain a return on their investment in the small business. Angel investors also invest in the business with the hope of gaining a return, but unlike venture capitalists, they are individuals who use their own money. Other factors such as the viability of the proposed business might impact the ability of the entrepreneur to find funding for the new venture.

A small business startup can avoid the shortfalls of insufficient capital by raising the initial capital to keep the business operating normally for the first three months without the need to draw money out of the new entity. This approach ensures smooth operations and takes into consideration the likelihood that the small venture fails to generate profits in the first few months. A business plan is useful in financing a new small business. A good business plan in itself can help convince investors or other possible sources of capital to fund the new venture. Entrepreneurs should undertake careful planning to ensure the business finds enough capital to keep operating until it generates enough funds to sustain itself.

Regulatory Challenges

Regulatory hurdles are a cause for concern when starting a small business. According to Moutray (2008), the regulatory environment is an important element of the business environment that poses challenges for small businesses. Tax laws may impact the funding needs of the business. Some of the regulatory challenges with major implications for small business startups involve the business name, ownership, intellectual property, and permits to operate the business. Starting a new business may be subject to approval from a licensing body for the specific industry or a general licensing body. The best research paper writing service noted that a good business environment facilitates starting new businesses by minimizing hurdles such as an unnecessarily long and burdensome approval process. Depending on the industry, the proposed business may be obliged to go through lengthy compliance procedures to avoid penalties for breaking existing laws. A lack of adequate capital indicates an inability to hire consultants to help the founder meet the relevant regulatory requirements. Such limitations leave entrepreneurs with the choice of relying on their knowledge to meet any regulatory requirements. Agencies such as the United States Small Business Administration provide assistance on regulatory requirements when starting a small business.

Lack of Relevant Experience

Lack of experience when starting a small business has major implications for the new entity. Knowledge of the industry, customers, and product are touted as essential for small business success, but small business startups might not have sufficient knowledge of these elements for various factors. Prior experience in running a similar entity may prove invaluable when starting a new small business. Prior experience provides the founder with insights into the nature of events that await the new business. Such knowledge can be incorporated into the planning phase.

Resource limitations hinder the ability of a small business to hire experienced talent. Human capital is costly as reflected in the definition of small businesses. Small businesses tend to have few employees as their resources limit the number of separate job positions in the entity. Experienced talent brings invaluable knowledge and skills to the new small business, helping it to navigate the hurdles that lead to small business failure. A lack of experience pushes entrepreneurs to spend more time and resources obtaining information on the business. In some cases, such activities contribute to burnout because they lead to long hours at work trying to figure out the appropriate solution to a problem.

Lack of experience can lead to poor decisions. Although experience comes as a result of both good and bad decisions, making many bad decisions can be detrimental to the survival of a new small business. New businesses are at higher risk of failure because they are not established in the market. This risk is exacerbated by limited resources in small businesses. Experience reduces this risk by informing business decisions as the new small business tries to navigate the launch phase.

There are several strategies that entrepreneurs can use to deal with the issue of lack of experience when starting a new small business. Longenecker, Petty Palich and Hoy (2013, p. 171) suggested learning about the business or hiring a consultant to provide advice on specific issues and activities that are too complex for entrepreneurs and their teams to solve. Small businesses tend to focus on a narrow market. The narrow market focus presents small business founders with the opportunity to learn about their market to a great extent. In-depth knowledge of the market offers the entity a sound business background for making informed decisions. Hiring a consultant might prove expensive for some small business startups. An alternative strategy for small businesses to overcome the problem of lack of experience involves seeking mentors and networking. Business contacts obtained through networking can prove useful when starting a new small business. The founder can learn about suppliers and trends in the industry from contacts acquired through networking.

Conclusion

There are many difficulties in starting a small business, including poor planning, lack of sufficient capital, regulatory challenges, and lack of experience or knowledge in the area of interest. Poor planning undermines various aspects of the new venture and increases the risk of failure to a large extent. Lack of capital can cause disruptions in the operations of the business while regulatory challenges add additional costs to the business. Lack of experience causes poor decisions. When starting a small business, it is important to anticipate any risks and challenges and accommodate them in the plan phase.

References

Bonham, S. S. (2008). Actionable strategies through integrated performance, process, project, and risk management. Artech House.

Butler, D. (2014). Business Planning for New Ventures: A guide for start-ups and new innovations. Routledge.

Longenecker, J. G., Moore, C. W., Petty, J. W., & Palich, L. E. (2008). Small business management: launching and growing entrepreneurial ventures. Cengage Learning (p. 768). ISBN 0-324-56972-6. OCLC 191487420.

Longenecker, J. G., Petty, J. W., Palich, L. E., & Hoy, F. (2013). Small business management. Nelson Education.

Moutra y, C. (2008). Looking Ahead: Opportunities and Challenges for Entrepreneurship and Small Business Owners. Working Paper. The United States Small Business Administration. Retrieved from https://www.sba.gov/content/looking-ahead-opportunities-and-challenges-entrepreneurship-and-small-business-owners

Root, H. (2006). The small business start-up guide: a surefire blueprint to successfully launch your own business. Sourcebooks, Inc.

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The United States Small Business Administration (2014). How and Why to Determine if Your Business is “Small”. Retrieved from https://www.sba.gov/blogs/how-and-why-determine-if-your-business-small