Entrepreneurs tend to be quite confident in their abilities — who could start a company from scratch and build it over time without self-confidence? However, small business owners tend to lack confidence in their financial performance, according to a survey by Kabbage, a data and technology company providing small businesses cash-flow solutions.
The research was done pre-COVID-19, and the pandemic has of course provided many business owners ample reason for serious concern. But the findings suggest if you can make it through this, your prospects for the future may be much brighter than you think.
Among 600 owners surveyed, 60% ranked their revenue growth below the 50th percentile compared to similar-sized small businesses. That’s mathematically impossible. The findings suggest entrepreneurs pack unwarranted self-doubt about their company’s financial health and don’t have a full understanding of their industry or market.
“Having studied the effects that confidence levels have on decision-making for over 20 years, I’ve found entrepreneurs are often overconfident,” said Don Moore, a management professor at the University of California, Berkeley’s Haas School of Business who helped design and analyze the study. “However, this study shows the potential for small business owners to err on the side of under-placing their performance when comparing themselves to others.”
The effect can be more pronounced the smaller a business is, because an owner may have few if any other people to turn to advice, and likely has limited market intelligence at their fingertips, Moore said. The owner of a small company is apt to pay more attention to competitors they know socially, or through their local chamber of commerce, or who are particularly successful.
Simply put, people assume they’re worse than others when a task is hard. Both running a small business and benchmarking performance without solid data are difficult tasks.
Don Moore, management professor, University of California, Berkeley
“Those are businesses that will loom particularly large in their imagination and may not be representative of the full set of competitors,” Moore told CO—. “Every businessperson ends up falling into this trap. They use the information that’s available to them, even when that’s imperfect and non-representative, and they make a bunch of predictable mistakes.”
There’s another common human tendency at work, too, and it applies to more than just finances.
“People tend to rate themselves below average on difficult tasks,” Moore said. “Simply put, people assume they’re worse than others when a task is hard. Both running a small business and benchmarking performance without solid data are difficult tasks.”
Moore advises hiring someone with expertise in market research or financial analysis, if that makes financial sense, or searching for online instructionals tailored to the questions and challenges of your specific business. Kabbage has an online database showing revenue growth for small businesses, by state and across several industries, which can serve as a benchmark for comparison.
“The pandemic has made life harder for most small- and medium-sized businesses,” Moore notes. “That probably has probably increased the tendency for them to feel that they're doing worse than others. Their own struggles are just that much more obvious to them.”
CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.
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