What does it take to be a successful small business? Studies conducted time and again reveal that a vast number of small businesses fail in the first few years. Only a few succeed to complete their first five years. Why this happens? Every entrepreneur, before starting his own small business, tries his best to make sure that he is well prepared. But still many of them fail. Most of the times, it is because SMEs at their initial stages focus exclusively on doing the right thing, but fail miserably to avoid some costly mistakes.

One of the common pitfalls into which start-ups easily tumble is undercharging. Working with small businesses for years, I have seen that many of them start their business undercharging for what they sell. There are usually two reasons for this: first, over-enthusiasm to attract sales — they think that it is the best way to get business in the already overcrowded market; second, they fail to set an effective price for their products — pricing decisions involve some careful considerations which they fail to address. In both these cases, the result turns out to be negative.

Another common mistake made by start-ups is that they extend credit to customers without doing much due diligence. Recently, a small business owner wrote to me how his business had once come to the brink of closure due to non-payment by a customer. It is true that selling on credit has become a way of doing business these days, but this by no way means that we should oversee risks in the hurry of bagging as much business as possible. Neither is it wise to trust a business only because it is a big name in the industry. So, caution is the key to minimize the risks of bad debts.

Customer concentration is another trap. Many start-up small businesses become complacent as soon as they get a few big regular customers. As a result, when one or two of these customers suddenly pull an order, they are brought to their knees. Every small business should take into account the risk of customer concentration and develop a contingency plan. Analysis of customer dependency should be done at a regular interval and whenever the findings indicate customer concentration this should be taken as a warning bell.

Emotions often don't mix well with business, but unfortunately many start-up entrepreneurs tend to make business decisions driven by emotion. I am not saying that emotional decisions are bad and rational decisions are good, but when it comes to business, you should train yourself to make decisions based on logic. I find many small business owners not following this rule. Spending big on expensive ads, for example, could be seen as self-serving and often does more harm than good to small start-ups.

I invite your opinions.