How to Overcome Small Business Challenges in Your First Two Years

Starting and managing a Limited Liability Company (LLC) comes with a unique set of small business challenges that evolve as your business grows.

In the first few years, every decision you make and every challenge you face can significantly impact the future of your business. After helping start more than 70,000 businesses in 50 states, we’ve seen these small business challenges unfold time and time again.

As a result, we have a front-row seat to the specific small business challenges that emerge at different points in an LLC’s journey. To help you become another success story, we’ve created this guide to the common hurdles you might encounter at key milestones of 3, 6, 12, and 24 months. Most importantly, we’ve included strategies to overcome these small business challenges.

By understanding what your business is up against, you can navigate these small business challenges more effectively and keep your business thriving.

Whether you’re a small startup or have dreams of scaling up to compete with larger companies, the insights provided here will help you prepare for success by addressing the small business challenges that matter most.

Small Business Challenges at 3 Months

The first three months of launching an LLC are critical and can determine the trajectory of your business. During this initial phase, small business challenges predominantly relate to establishing a solid operational foundation, managing cash flow, and ensuring regulatory compliance.

Establishing Operations

Setting up operations involves several key steps that can be challenging for new entrepreneurs: finding a suitable location, setting up equipment, and beginning business activities.

Finding A Suitable Location

The location of your LLC's operation is a key decision, as it influences not only day-to-day operations but also the potential success of your business.

Whether you’re setting up a retail store, an office, or a production facility, the site must meet several key criteria to ensure it supports your business objectives effectively. We've seen early businesses struggle with:

1. Location Compliance: The location must comply with local zoning laws, determining what types of businesses can operate in certain areas. This is essential to avoid legal issues that could arise from non-compliance. Local regulations may dictate specific requirements related to parking, signage, and accessibility.
2. Logistics:The site should be easily accessible to both customers and suppliers and should be able to grow with your business.
3. Cost: With costs increasing all over the U.S., funding your business location can be a major challenge. Your location must be affordable (a relative word) to be sustainable.

Naturally, your requirements will vary depending on the type of LLC you own and the funding you have. A retail store's needs will differ dramatically from a business that offers services exclusively online (such as a marketing consultant) or a manufacturing operation.

Identifying these needs before you make decisions will help you choose the right location from the start.

Thorough research, creating a realistic budget, consulting with legal and financial experts, and considering future expansion needs when selecting a site will ensure it aligns with your current needs and long-term business goals.

Setting Up Equipment

For LLCs that rely heavily on equipment and infrastructure (such as manufacturing and retail), the most common challenges that we've seen come up early on are:

1. High Initial Costs: Equipment can be expensive, and the initial investment can strain the finances of a new LLC. Instead of purchasing expensive equipment outright, consider leasing or financing options (or perhaps business loans). This approach can help spread out payments and may include maintenance.
2. Selecting, Installing, and Maintaining The Right Equipment:With the competitive US market, it can be difficult to choose the right equipment for your business. Setting it up can be even more difficult. Consult with industry experts or technicians to ensure that the equipment fits your needs and space. They can offer insights on the best models, setups, and integration practices. They can also offer insights on best practices for maintaining your investment so it lasts as long as possible.

Starting Business Activities

It's a common saying that the first step is often the hardest, and that's why LLCs at the three-month mark often struggle to begin their business activities in the following ways:

1. Building a Customer Base: Without customers, your business can not be profitable. Start marketing activities before you officially open your doors. Build anticipation and interest through social media, local advertising, or a launch event.
2. Seeking Regulatory Approvals, Licenses, and Permits:Depending on the business, you might need several permits and approvals before you can start operations, which can be time-consuming. It's also easier than you might think to neglect a needed permit simply because you didn't know about it. To make sure you have the right approvals, consult with local business networks, your chamber of commerce, and legal advisors. Create lists and timelines, and don't start operating your business until you have every approval that you need in hand.
3. Creating Operational Workflows: If you've ever had a terrible experience with a business, it's often because they did not establish clear processes to help you. Clear workflows and operational procedures require careful planning and adjustment, but you set your business up for success from the start if you put in this effort. Excellence requires repetition. Create SOPs (standard operating procedures) and manuals to standardize as much of your business as possible. You can also enlist the help of a business analyst or operations manager to help in this area. Common workflows to create are bookkeeping, business administration, and client deliverables.

Cash Flow Management

Perhaps the biggest challenge in the first few months is managing cash flow.

Many new LLC owners underestimate the amount of capital required to keep the business operating smoothly.

Initial expenses such as inventory, employee salaries, rent, and marketing can quickly deplete your resources. Effective cash flow management involves budgeting and making tough decisions about where to allocate funds.

Failing to master your cash flow effectively from the start with the added stress of lack of capital can lead to operational disruptions, stunted growth, or business failure in the worst-case scenario.

To overcome the cash flow hurdle, new business owners need to:

1. Understand their financial inflows and outflows
2. Create a realistic budget and stick with it
3. Establish lines of credit, or secure other types of funding
4. Seek out grants and incentives for businesses like yours

By anticipating cash flow challenges and preparing for them, we've seen LLC owners improve their chances of a successful business launch. Setting these good habits from the start also makes it more likely that you'll manage your finances properly in the long term.

Regulatory Compliance

Regulatory compliance is another challenge for new LLC owners during the initial setup phase. Complying with local, state, and federal regulations is not optional. Neglecting these requirements can lead to fines, penalties, losing your LLC's good standing, and even jail time.

From the outset, you must obtain all necessary licenses and permits to operate your business legally. This process varies depending on the industry, location, and business size. For example, a restaurant might need health permits, liquor licenses, and a business operation license, while a consulting firm may require state-specific professional licenses.

To meet this challenge, research or consult with legal experts to understand what applies to you. This might involve:

• Registering with state and federal tax authorities and understanding tax obligations.
• Complying with employment laws if your LLC hires employees. This includes understanding wage laws, anti-discrimination laws, and workers' compensation requirements.
• Adhering to industry-specific regulations, which may include environmental, consumer protection, and privacy laws.

Managing compliance avoids legal pitfalls and builds credibility with customers, suppliers, and financial institutions. LLC owners should invest in compliance from the start rather than fix oversights later, which is costly and damaging to the business’s reputation.

Small Business Challenges at 6 Months

Six months of operating an LLC is a significant achievement. Still, we've seen it bring a new set of challenges as the focus shifts from initial setup to operational stability and growth.

This period reinforces the foundation you laid and sets a trajectory toward sustainable growth.

The top challenges we've seen small business owners encounter at this stage relate to customer acquisition, scaling your operations, and financial management.

Customer Acquisition

Building a reliable client base is vital for the longevity of your business, but it requires the right marketing strategies and the ability to stand out.

Many LLC owners struggle to find the right balance between attracting new customers and maintaining the quality of service that retains existing ones.

According to Forbes, it can cost between 5-7 times more to gain a new customer than to keep an existing customer. With that in mind, find balance by:

1. Attracting New Customers: Create targeted advertising campaigns, use social media, and build an online presence.
2. Leveraging Existing Customers: Create referral incentives and repeat client offers. Be sure to collect customer testimonials and use them in marketing (with permission).

Your efforts must be well-coordinated and adjusted based on customer feedback and market trends. Additionally, you can seek out the services of a marketing specialist for help with customer satisfaction, but that can be costly.

Scaling Operations

As customer demand increases, LLC owners face the challenge of scaling operations to meet that demand.

After all, all the marketing efforts in the world are wasted if you can't serve the people you attract. You can create a scalable business by:

1. Hiring A Team: This requires hiring additional staff and increased administrative duties. We get it, the recruitment process and cost of finding the right staff can be a challenge in itself. One option is to work with a recruitment service.
2. Streamlining Your Processes and Communication: With increased staff and operational demands, there is a need for effective communication and systems. First, evaluate your current processes. Consider adjusting and refining them, even upgrading technology or infrastructure to handle increased workload. This helps ensure the business can scale without compromising service quality or efficiency.

Financial Management

Another critical point at six months is financial management—82% percent of businesses fail due to challenges in this area.

Effective budgeting, expense tracking, and financial planning become even more essential as the business grows. We've seen the most successful LLC owners:

1. Develop financial controls and monitoring systems. Creating a budget and consistently reviewing your cash flow helps anticipate financial needs and secure funding for expansion.
2. Manage expenses carefully to avoid overextending the business. This might involve making strategic decisions about investments, marketing, and operational expenses.
3. Proactively plan for future growth. This requires a clear understanding of your financial projections and potential market fluctuations. These areas impact revenue and profitability.

Proactive financial management helps maintain a healthy cash flow and positions your business for opportunities that require quick financial decisions. This includes capitalizing on bulk purchase discounts or investing in rapid market expansions. For help in this area, a business financial planner can be a huge asset.

Small Business Challenges at 12 Months

Reaching the one-year milestone means it's time to celebrate your LLC's success, identify areas for improvement, and set the stage for sustained growth. It presents unique challenges that require even more proactive management.

At a year, the most common challenges we've seen our clients encounter involve maintaining customer relationships, adapting to changes in the market, and strategic business planning.

Maintaining Customer Relationships

Maintaining strong customer relationships is pivotal for fostering loyalty and encouraging repeat business. Research by Bain & Company highlights that a 5% increase in customer retention can enhance profits by 25% to 95%, demonstrating the impact of loyal customers on profitability.

The second benefit is that it creates a much more pleasant place to work.

To build customer relationships, focus on more than just sales transactions. As Damon Richards put it, "Customers don't care how much you know until they know how much you care."

To create better customer relationships:

1. Personalize Interactions: This shows you value and understand your customers. You can create personalization in many ways.
   • Use a customer's name more frequently.
   • Send custom thank you or anniversary notes.
   • Create segmented email campaigns.
2. Provide Exceptional Service: Aim to exceed customer expectations with the quality of your service. Go above and beyond in addressing concerns, offering support, or adding small touches that enhance their experience.
3. Solicit and Act on Feedback: Regularly gather customer feedback and act on it to improve your products and services. Showing you value their input and are willing to make changes can significantly enhance trust and loyalty.
4. Reward Loyalty: Implement a loyalty program that rewards customers for repeat business. Discounts, exclusive offers, and special customer events can show appreciation and keep them coming back.
5. Stay Connected: Keep in touch with customers through regular newsletters, updates, and promotional offers. Consistent communication keeps your brand top of mind and strengthens customer relationships.

Investing in strong customer relationships drives repeat business and promotes positive referrals, making it a vital component of any successful business strategy.

Adapting to Market Changes

After a year in business, your LLC must adapt to external pressures such as competition, changing customer preferences, and economic fluctuations. Adaptability is essential for staying relevant and competitive.

Understanding and responding to changes ensures your businesses can continue to meet customer needs effectively and stay ahead of competitors.

Jack Welch, former CEO of General Electric, famously said, "Change before you have to," emphasizing the importance of anticipating market shifts rather than waiting to be forced into action.

Our clients who have successfully overcome these challenges tend to:

1. Continuous Market Research:Regularly monitor industry trends, your competitors, and consumer behavior to anticipate changes. This proactive approach allows businesses to adjust strategies promptly.
2. Create Flexibility in Operations: A business model that allows for flexibility in product offerings and marketing strategies can make responding to shifts in the market or unexpected challenges easier.
3. Engage with Customers: Maintain open communication channels with customers to receive direct feedback on their changing needs and preferences. This insight is invaluable for adjusting products and services to better serve them.
4. Plan For Various Scenarios:Regularly engage in scenario planning to prepare for potential market changes. This involves imagining different potential future scenarios and developing plans to address them.

By using these strategies, your businesses can not only survive but thrive amidst market changes. Adapting proactively secures a competitive edge and positions your company as a market leader, responsive to its customers and resilient against economic turbulence.

These adaptations must be carefully managed to ensure they align with the company’s core values and long-term objectives.

Strategic Planning

Strategic planning lays the groundwork for future growth. Unfortunately, many businesses fall down in this area, to their detriment.

According to research by Bridges Business Consultancy, almost half of business leaders spend less than a day per month discussing strategy. It's not a surprise that less than half of businesses reach their targets (as per the same study). After all, how can you meet your goals if you have no plan to get there?

To incorporate strategic planning into your business, try the following tips:

1. Set Clear Objectives: Define specific, measurable, and realistic goals that align with your business’s vision and mission. Clear objectives guide decision-making and resource allocation.
2. Create A Target-Based Roadmap: Identify what needs to be accomplished on a micro level to reach your ultimate goal. Assign due dates, and clarify who is responsible for individual tasks.
3. Regularly Review and Adjust:Your strategic plan may need to be adjusted as new information and opportunities arise.
4. Utilize SWOT Analysis:Conduct a SWOT analysis to identify strengths, weaknesses, opportunities, and threats. This analysis provides insights that can shape priorities and initiatives.
5. Plan for Contingencies:Include contingency plans for potential risks and challenges. Being prepared for uncertainties helps maintain stability and confidence among stakeholders.

This approach helps drive progress and builds resilience, allowing your business to adapt and thrive in an ever-evolving market.

Small Business Challenges at 24 Months

If you've made it to the two-year mark, congratulations! About 20% of businesses have failed by this point, and you’re the exception. Reaching this point in the life of an LLC is a testament to resilience and adaptability. It also signals the need for strategic shifts to ensure continued its success and growth.

This stage often requires a deeper focus on evolving the business model to stay relevant and competitive in a changing marketplace.

At two years, we frequently see challenges with innovating and improving a business, managing growth, and legal and compliance issues.

Innovation and Improvement

The need for continuous innovation and improvement cannot be overstated. Businesses that make innovation a part of their business model see a 30% higher growth rate than those that don't.

This highlights the direct impact of innovation on business growth and sustainability.

A quote we love about innovation comes from former Amazon CEO Jeff Bezos, "If you double the number of experiments you do per year, you’re going to double your inventiveness."

With that in mind, the companies that do well in this area tend to do the following:

• Encourage Experimentation: Embrace calculated risks and view failure as stepping stones.
• Invest in Technology: Use technology to streamline processes, enhance offerings, and improve customer service. Don't get mired down in the mindset of "Well, this is how we've always done it, no need to change."
• Stay Customer-Focused: Collect and analyze customer feedback to identify areas for product improvement and innovation. This is a part of your business operations already, right?

Managing Growth

Managing growth is critical as scaling too quickly or too slowly can both pose significant risks.

As businesses grow, they can struggle to maintain the quality of their products or services, hurting their reputation. Don't make the mistake of equating growth with success. A few ways to manage growth successfully are:

• Strategic Hiring: Develop a strategic hiring plan that aligns with your business’s growth objectives. Focus on recruiting individuals who not only have the necessary skills but also fit the company culture.
• Standardize Processes: You've already laid the foundation for processes if you've followed our guide. Continue to implement them and improve them as needed. Create quality control systems to ensure consistency as your operations expand.
• Monitor and Adapt: Continuously monitor your growth and operational metrics. Be ready to adapt strategies as necessary to address potential overextensions or inefficiencies.
• Seek Professional Guidance: The help of a talented professional, such as an operations manager or business consultant, can be helpful at this point.

Legal and Compliance Issues

Complying with legal and regulatory requirements is essential for any business, as neglecting this area can result in fines, legal action, and damage to your LLC’s reputation and standing.

In the early stages of your business, you went through the process of securing licenses and permits and filing Articles of Incorporation to become an LLC. At the two-year mark, the focus is on keeping these approvals active.

The challenge is often completing the requirements, tracking them, and staying updated with laws and regulations. This last point is noteworthy, as new laws can be enacted without much notice.

To stay above board with legal and compliance requirements:

• Schedule Regular Reviews: Review your business operations, contracts, and agreements to ensure they comply with current laws.
• Stay Informed: Keep up with changes in legislation that might affect your business by subscribing to legal updates or working with a legal professional.
• File And Pay Taxes On Time: To make this process as easy as possible and lower your tax burden, work with a tax professional. Continue to keep your personal and business finances separate and maintain meticulous financial records.
• Create A Compliance Calendar: Easily track your renewal deadlines by making and sticking to a calendar of due dates. Tax filings, annual reports, and license renewals should all be added to this calendar.
• Observe All Formalities: Host annual meetings and document decisions by creating meeting minutes.

Embracing Small Business Challenges for Lasting Success

Owning an LLC comes with a series of small business challenges, but when approached with the right strategies, these hurdles can lead to greater stability and success. From the early stages of setting up operations to scaling and staying compliant, each phase of your LLC's journey requires careful planning and management.

Starting with decisions on location, equipment, and cash flow, your focus will shift as your LLC grows. Maintaining strong customer relationships, adapting to market changes, and fostering continuous innovation become essential for staying competitive and ensuring long-term success.

To navigate these small business challenges effectively:

• Stay proactive about innovation and improvement to keep your offerings relevant and competitive.
• Manage growth to ensure scalability without compromising quality or operational efficiency.
• Keep stringent tabs on compliance to safeguard your business against legal pitfalls and maintain its standing.

Remember, business success isn’t a destination but a journey of continuous learning and adaptation. We've seen our clients succeed time and again, collectively earning over $1 billion in revenue.

By tackling these challenges head-on with preparation and foresight, you position your LLC to become another success story.