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6 Fatal Mistakes Business Owners Make

By: Ted Jenkin

 

Concentrated and serious young man businessman works in the office at a laptop on a new project, looks intently at the monitor, solves a question, conducts an online conference.

It’s challenging to start a business no matter what stage of life you are in currently. But, with today’s access to blogs, podcasts, seminars, and webinars, there is a wealth of information out there to help you minimize your mistakes and maximize your success. Having started more than 15 businesses and selling three of my own, here are six fatal mistakes business owners make that could cut your venture short.

UNDERCAPITALIZATION

Undercapitalization really involves the language used when a personal cannot sufficiently fund their business venture. An idea alone will not lead to business success. This lack of capitalization not only includes the initial outlay to get the business up and going, but really miscalculating the operating expenses in the business especially in the first year of operation.

Here are three smart things to be thinking about so your new entrepreneurial venture doesn’t fall short financially.

  1. Lines Of Credit– Whether it is a true banking relationship, or you have set up an arrangement with family and friends, do you have a written documented line of credit that you can access should the business need capital. Or do you have credit cards available with lines of credit ready to go if you have no other access to capital?
  2. Up Your Pro Forma By 50%- Whatever you run for your first year of expenses, add 50% to the total number. There will be plenty of unforeseen expenses as the new venture kicks off in its first year.
  3. Lease vs. Buy– Many banks will work out a 3 year or 5-year $1 buyout program on equipment which may allow you to use your upfront capital more effectively in the first year of business.

KNOWING YOUR ROLE

As an entrepreneur starting a new business, you often have to wear the hat of cook, dishwasher, accountant, and general manager. However, one of the biggest mistakes a young owner will make is not quickly clarify their role within the organization. Far too often, new entrepreneurs will try to control every aspect of a new business which inevitably slows the growth of the organization. In some cases, it can make hiring and training new people so difficult it can be destructive to the success of a company.

One of the things we recommend to new business owners is to draw a T chart with one axis being things you like to do and one access being tasks that you are good at. What you should quickly try to figure out in the early stage of a new company is to list all of the items that you are good at and those tasks that you like to do. After figuring out this critical piece of analysis, you should begin to try to surround yourself with others who you delegate the things you aren’t good at, and you don’t like to do.

Here are a few tips to consider when trying to figure out what your role is as the owner of a startup.

  1. Your Passion– With the thousands of successful business owners I have known and worked with over the years, the very best of entrepreneurs are the ones who define their role by their passion. If you are excited about what you are doing every day, the people you hire that work for you will feel that energy through the organization until it becomes infectious.
  2. Your Skills- You have had both formal schooling as well as informal training through odd jobs over your life. Think about the courses in school that you excelled at the most and why you did very well in those classes. Think about the jobs where you wanted to work overtime because you loved what you were doing, and you were successful in the tasks that were given to you. It is important that you maximize your strengths.
  3. Your Vision- Your role within your new entrepreneurial venture should always be focused on the bull’s eye of your company. If you had a target to shoot at with a bull’s eye in the middle, what words or goals would be written on that bull’s eye? It is important that your energy gets focused on the things that drive the vision of where you want to be in 1, 3, or 5 years.

PRICING YOUR PRODUCT

In the first year of a startup operation, there is a great focus of energy from the new business owner on client acquisition. Gaining new customers opens the floodgates for the generation of revenue to pay the bills of the business. However, one of the tough lessons learned by young owners is not thinking clearly though pricing out the services of your business correctly.

Most new business owners tend to undervalue what they charge for their work and services in order to compensate for not being as established as their competitors. As long as you have a top-notch customer service experience and offer a product or service that’s similar or better than a competitor, you shouldn’t devalue yourself. If you set this pattern up early with clients, it can be very difficult down the road to raise your prices with your initial customers.

Here are a few tips to determine if the price is right on your new product or service you take to market.

  1. Shop The Competition– As part of a new entrepreneurial venture, you should be doing some research about what kind of competition you have locally or on the internet. Take stock of where your competitors have set the market rate and place your prices relative to the value you believe you can deliver on in the marketplace.
  2. Beta Test Your Top 5- If you have 5 people you know who you are pretty sure will buy your product or service, consider throwing a red herring at them around your pricing structure. Gaining some valuable feedback from these customers could prove to be instrumental in bringing more like kind customers down the road.
  3. Offer Options– Having several options such as being able to pay annually or monthly, credit card or PayPal, or slight variation of choices off of the same service will allow more new customers to determine the price that is right for them. Be careful about just picking one price point at the initial phase of the business.

POOR STAFFING DECISIONS

If we were to use a baseball analogy, what jobs are you going to be a player at in the company? What jobs will you play the part of being a coach at in the company? What jobs will lie somewhere between those roles? The first thing for you to figure out is what your role is going to be, and that makes the process of making the right staffing decisions a lot easier. Here are three points to consider avoiding making poor staffing decisions.

  1. Hiring family members—This can certainly be a dual edged sword as there have obviously been many successful family businesses over the years. However, it is important to determine if the family member you are hiring has the skills to fill the position you are trying to hire for in your company. While you may potentially get some more immediate loyalty and buy in from a family member, it can also be a lot harder to separate ties should that person not be able to fulfill their obligations within the job. You should be certain that you compare and contrast multiple candidates before you make a quick hire with a family member because it is ‘easy’.
  2. No set interviewing process—Let’s face it, resumes are somewhat of an art form today. It’s really hard to rely on a one-page document that is probably more processed than Velveeta cheese. You should have a series of interviews (with more than just you) designed to learn more about the candidate personally and professionally. One of the early mistakes new entrepreneurs make is they gloss over checking references. A really good candidate should have willing work and personal references who will speak on their behalf so you can validate the quality of the candidate. No references may give you a flashing red sign that the candidate did not perform well in their past few jobs. Make sure you run each candidate through some type of technology test as almost all interviewees put down that they know how to do PowerPoint, Excel, etc., but few really know these programs.
  3. Have a dating period—One of things I learned as an entrepreneur is to fail fast. Don’t hire a new candidate full time until you have some sort of 90-day trial period. During that dating phase, your level of difficulty and scrutiny should be as high as humanly possible. You don’t want to become buddy buddy with your new employee as this will set things off on the wrong path. You should be certain to test every aspect with the candidate on the job after they have passed your interview process to make sure this is the right candidate for your company. Otherwise, you’ve only lost 90 days if it doesn’t work out—or less!

LACK OF EXECUTION

If you like to read, we highly recommend that you pick up a book written by Larry Bossidy and Ram Charan called Execution. There is a wealth of knowledge in this book about execution, and how to be very successful at getting things done. Here are three mistakes new entrepreneurs make when it comes to execution.

  1. Changing the plan too often—One of the sayings I love is that focus beats brilliance all the time. In your first year of business, it is very easy to get distracted by five more new money-making ideas that you see as ventures that can put additional dollars in your pocket. The problem is that if you lose focus on the plan you put together when you started the business, this can confuse your employees, potential investors, and even you as the owner. As hard as it will be to this, try to refrain in the initial stages from changing the game plan you laid out for you and your employees as this will be a bottleneck in achieving execution of your game plan.
  2. No benchmarks and review process—Since the first year of the business will fly past you in the blink of an eye, it is crucial to have a dashboard against the major metrics you are trying to achieve in the business. Whether this is a gross revenue number or a certain number of new clients, it is truly important to have a score card so you can on a daily or weekly basis see how you are doing against plan. In an effort to decide how to channel your time, energy, and financial resources, this dashboard and regular review process will allow you to make the best decision on where to execute. Then, you can step back (or you and your management team) and decide the best way ‘how’ to execute.
  3. Poor communication –Since you are the visionary of your business, it will be very easy for you to connect your actions against what you see being the end in mind. However, day to day, it can be very difficult for employees in your organization to understand the why behind what they are doing because they cannot connect dot A to dot B. You need to make sure you are overtly clear on linking the strategies you are putting place for the organization against the vision on where you see the company going in one, three, or five years. One of the biggest mistakes new entrepreneurs make is in the area of communication with their employees and their investors. This can be a big problem in trying to execute your main initiatives in the first year.

MILKING THE BUSINESS

If you have worked for a corporation for a few years before you start your own venture, you need to really prepare for the first time of not having a paycheck every two weeks. While you hear stories about all the personal things that your business can pay for through the company, milking your company can be a very big problem. If you start to build the mentality that the company can pay for just about anything because it is a write off, you could end up having substantial problems meeting payroll, debtors, or hitting the bottom-line targets you are aiming for at a company level. So how do you avoid milking the company?

  1. Decide on the right level of cash reserve—Although your accountant might like the fact that interest rates are really cheap and tells you to draw down your business account to zero, I like the idea of having a cash reserve just like you would have in your personal life. I recognize that business accounts don’t earn any interest, but I think as your company becomes profitable it makes sense to sacrifice some personal income to build up at least 3 to 6 months of your monthly expenses into your business cash reserve (separate from your personal cash reserve). By doing this, it will build some discipline to only draw what you really need to live on until the company has bigger and better profitability.
  2. Make a pro forma for the year—As hard as you try, it’s going to be near impossible for you to know every single expense that will hit the business in the startup phase. There is going to be some legal, technology, or staffing bill that will pop up at some point out of the blue. However, by setting out a pro forma in the beginning of the year you can clearly make a demarcation line of which bills you will try to run through the business, and which will remain personal. Remember, the more of a burden you put on the business with expenses will have a reflection on how you make some of your growth decisions. Try to make the pro forma by adding only discretionary expenses that make sense for the business in the initial stages.
  3. Create a check and balance system—I think it’s important to have someone else work on your books besides yourself. If you don’t have a set of books, you have officially uncovered your first problem. Having an outside third party or an internal partner/employee act as some sort of check and balance system is a good idea. Think about it this way. . . If you are the judge and jury on all of the financial decisions, what do you think is going to happen in a time where you need money or want to buy something for yourself?

These are just six of the fatal mistakes that business owners make, however there are many more. At ESL Advisers, we are one of the leaders in the country helping entrepreneurs grow and sell their businesses. For more information on how we turn good into great, go to www.esladvisers.com

Published: January 10, 2024
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