The leading cause of the collapse of a small business is its failure to determine early on if the market is sufficient to support the business. A lot of entrepreneurs rely simply on their gut feeling and start their own businesses without verifying whether there is demand for the product or service. Only after they have infused capital, time and effort in their start-up do they sometimes learn of the insufficient demand. Or sometimes, they find out too late that the market is thin.

Determining the level (and lack of) demand is something preliminary market research should be able to identify. If you are short of capital and cannot afford a full market research, you can talk to existing businesses in the same industry, suppliers, your chambers of commerce, trade associations, and even potential customers to check the market for your business. (Read Market Research on a Tight Budget) The important thing is to gather as much information as you can about your market.

Your product may either be too ahead of its time, or the market is already saturated with suppliers. If there is no demand, the best course of action is to revise your business plan as fast as you can and rethink your business strategies. A smart entrepreneur knows when to cut their losses and move on to the next challenge. Thin markets can be dealt with by offering an array of products or services so revenues can be derived from a variety of sources.

Poor Operational Management

Many small-business owners find the business end of their operation a chore. For example, keeping financial records and calling on past due accounts may be tasks that they don't like. They would rather pursue a more exciting task, like developing their business strategies and identifying new markets.

But watch out! The better you are at what you like to do, the more likely you are to commit a basic business mistake. You may tend to focus solely on what you like to do and ignore what you should be doing. Business is not all strategizing; there is the day-to-day operations that you need to think of.

Contract Mistakes

Another common mistake of small business entrepreneurs is the failure to have a written contract. A lot of them simply rely on ‘handshake agreements’, where word-of-honor is the governing business code.

Any business that operates without a written contract is asking for trouble. Partnerships may technically cease to exist if your partner leaves. Leases could be canceled, and you open yourself to unnecessary legal action. A Florida businessman was crying out his misfortune on TV when the building that houses his small office was sold and he is now being asked to leave ­ after spending most of his capital renovating his office! Unfortunately for him, he cannot fight back as he has no written lease agreement with the previous owners.

This situation is particularly evident among business partnerships. In fact, some studies have shown that about half the business partnerships in the country operate without a formal written contract or under an outdated contract. One author described a partnership without a contract as “like a common-law marriage: it has most of the advantages of a marriage but enjoys few of the legal protections of the fully sanctioned union.”

If you are going into business with other people, the best thing to do is to identify the commitments of both parties and formalize the agreements reached in a contract. Draft an agreement that is acceptable to all of the parties. Having a written document is the best protection you can ever give to your business.

“Find Me” Mistakes

"The customers will find me" is a common start-up mistake. Unless your business is located in the heart of the commercial district or in the center of the shopping mall, you should never sit down and passively await for your customers. You need to go out there and help them find you! This is particularly true for an online business ­ building a web site is not a guarantee that you will attract traffic. You need to actively promote your business.