Startup Basics

5 Common Pitfalls That Ruin Businesses -- and How to Avoid Them

5 Common Pitfalls That Ruin Businesses -- and How to Avoid Them
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If you’re trying to picture all the events and factors that can possibly ruin a business -- stop. It would be virtually impossible to list out every conceivable piece that could ultimately lead your company to a disaster, and some of the most dangerous problems are the ones you never see coming.

That being said, many businesses do collapse as a result of common, preventable issues -- and understanding those issues, before they do any real damage, can put you in a position to prevent or mitigate them. Startups are especially vulnerable, with limited resources and a weak, volatile structure, but entrepreneurs can prevent disaster simply by taking measures to look for these all-too-common pitfalls:

1. Insufficient capital

In order to function, businesses need money, and a good share of it. Startups usually have trouble finding the resources to start -- either finding funding, attaining credit or pooling personal financial resources to try and make ends meet. More experienced companies usually suffer from insufficient capital when their spending starts to outweigh their revenue.

Related: The 7 Toughest Startup Lessons You Don't Want to Learn the Hard Way

Keep a handle on your capital situation by monitoring your cash flow. Closely monitor your expenses, and don’t be afraid to make cuts if you need to. The earliest stages of your company’s growth are the most vulnerable to insufficient capital, but that doesn’t mean you’re out of the woods once you’ve been around a few years. Watch your numbers closely.

2. Poor growth speed

Another key reason for business failure is an inappropriate growth rate. For most entrepreneurs, that reads as “not growing fast enough,” but growing too fast can be a problem too.

Not growing fast enough means you’ll be expending lots of money, but you won’t have the customers or the revenue to exceed it. Growing too fast comes with a different set of problems -- demand becomes too high, resources become overworked or poorly trained, and your customers have inconsistent experiences.

Work closely with all your departments, especially your marketing team and human-resources department, to make sure your company achieves a reasonable, steady pace of growth.

3. Competition woes

Never underestimate your competition. Competition can crush your business totally if you aren’t careful, especially if you haven’t taken the time to fully understand it. Startups based around a new idea sometimes get too sure of themselves, neglecting to keep a watch on the markets -- competition isn’t necessarily a bad thing, but you need to make sure you differentiate yourself in a way that makes your company seem like the more appealing service.

Bigger companies also struggle with competition, but usually in the form of more nimble startups. For example, giant tech firms often struggle to keep up with the ingenious pace of new tech startups -- some find a solution in acquiring the agile business, rather than trying to compete directly. There are many strategies to deal with the competition, but you need at least one.

Related: 3 Tips to Keep Entrepreneurs Out of the Weeds

4. Internal strife

Internal strife can tear a company apart, especially during the early stages of development. In many startups, entire departments are reliant on a small group of workers, and if all those workers leave -- the department is, in effect, crushed immediately. If there is a disagreement between department heads over the direction of the company, the entire enterprise could be thrown in turmoil, and customers could suffer as a result.

Even bigger, more tenured enterprises can fall apart due to internal strife -- just at a higher level. If the CEO and the board of directors cannot reach agreements, or if partners cannot resolve a dispute, that tension trickles down, and eventually, the whole company suffers the consequences.

5. Dependence

Too many companies fail because they were overly dependent on one thing. Maybe that’s a highly valuable customer. Maybe it’s a very talented and experienced worker. Maybe it’s just an environmental condition that allows for the company to be successful.

Customers can opt out. Workers can quit. Environmental conditions can -- and will -- change. If you allow any part of your business to be dependent on anything, you’re setting yourself up for disaster (or at least a huge gamble). Instead, hedge your bets by investing in multiple variations and multiple, complementary dependencies.

By no means are these five pitfalls intended to cover every possible disaster that could befall your company. There are plenty of other dangers that could weaken your brand or compromise your internal structure -- but these are some of the most common and some of the most preventable.

As the leader of your company, your sight needs to be focused on the distant horizon, not on the small day-to-day problems that almost always work themselves out naturally. Keep watch for these encroaching hazards, and take immediate actions to thwart them before they become irreversible. 

Related: Why Startups Fail, According to Their Founders