Growing a business takes a lot of hard work, tons of determination and many knocks along the way. It’s part talent, part science, part art and doing it well can be very rewarding. However, it can quickly turn into a financial disaster from which it is very difficult to recover.
There are several common mistakes that excited entrepreneurs make, that quickly lead to downfall. So, what are they?
No Business Plan
Would you start out to an unfamiliar destination without consulting Google Maps? But many new business owners start their business without a business plan. A business plan is the map to your destination. Knowing how you’re going to get there and what it looks like, helps to create success.
Creating a business plan forces you to document the business goals, your target market, investigate similar businesses and your competition, consider viable locations and do a financial analysis. A good business plan will give you the confidence to proceed with the business, or scrap it altogether and work on a new idea.
Quite often, businesses fail within the first year because they have not done enough research, and demand for that type of business is either not there, or the space is over populated. A good example is hairdressing businesses. Quite often there are at least 2 hairdressers on the same main road, within 500m of each other.
Lack of Cash Flow
Cash is king and we all know that without cash, we can’t pay our bills. And starting a new business can be draining on the hip pocket. Even lean start-ups need websites and business cards, the right equipment and a marketing budget.
A successful business needs a budget, some funds in reserve and cash flow in the form of paying clients.
Keep in mind that a good Accounts Receivables (paying clients) timeframe can look something like this: two weeks to acquire a new client | four weeks to complete the work | 14 business days invoice | … if they pay on time which most clients don’t, that’s a 58-day period with no cash flow!
Applying for Unnecessary Credit
Five years ago many of us knew what it was like to have a $50 note, spend $25 and get change. Now we live in a world of tap-and-go phone apps and after-pay arrangements. Our society has less understanding of money and is therefore now more willing to take on unnecessary credit. And let’s be honest, it’s convenient to have a line of credit, or a larger credit card limit to get you started in a new business.
But herein lies the dangers. All credit facilities come with monthly repayments and interest charges, costing you more in the long run. Interest rates fluctuate, which can greatly increase the monthly repayments without notice. And if the business does not kick off as quickly as you had planned, you still need to make those repayments. Falling behind in your payments can lead to a bad credit rating, or worse, financial hardship, asset repossession, or even bankruptcy.
Buying Unneeded New Stuff
Most people think that when they are starting a new business they need to race out and buy all new equipment. But the real question should be “does the thing do what I need it to?”
Does the laptop you have produce documents, send emails and surf the net? The answer is most likely yes. So, it makes more financial sense to use the laptop that you currently have until it dies and then by that time, you should have a growing business and better cash flow to fund the purchase.
A big common mistake made by many young business owners is once cash flow becomes steady, they race out and buy (on credit) a new car, or bigger home. Whilst that may be an exciting thing to do and creates a feeling of personal success, it also puts a strain on the budget and lessons the amount of cash available to manage the everyday business expenses.
This is particularly dangerous in a product delivery business, such as construction, manufacturing, or retail.
Quite often new businesses think that to beat the competition and attract clients, they need to sell at a “discounted price”. However, this creates two problems. The first is that you need to make a profit to survive and secondly, you are setting a customer expectation going forward! A better idea is to set a fair price and attract fewer customers initially while still growing the business, than to under-price and crash and burn early.
Your pricing needs to consider the cost of the item (to manufacture, or purchase), plus the cost of your overheads to run the business to arrive at a fair price. Obviously, the more items you sell, or the more clients you serve, the more profit you make (because the overheads are spread).
Running a business can be an exciting game. You can get caught up in the moment, or have a great new idea spring into your head at any time. But that doesn’t mean you need to action it there and then! But many do. Taking risks is a big mistake in business, because it leads to the unknown.
Before taking any action, or making any decisions, the most productive thing to do is ask questions, do some research, consult professionals, evaluate options and outcomes and have a plan B! Taking fewer risks and being more calculated just makes good business sense!
Quitting your dreary 9-5 job to create your own destiny sounds exciting, but what you’re also quitting (in most cases) is a weekly pay cheque, a set 40-hour week instead of 60-80 hours – most of which is unpaid, annual leave and sick leave – there is no such thing as sick leave for the self-employed! And being able to sleep well at night.
But for those who do make the move and are successful, it is both a very exciting and can be a very rewarding career move.