As a serial entrepreneur with experience owning and operating many different types of businesses (I get bored really fast) and having consulted and helped many entrepreneurs, I have been able to identify a number of recurring mistakes that beginner and veteran entrepreneurs make that spells the demise of what could have turned out to be a phenomenal venture.
As such I am sharing with you my key findings on the 15 most common and costly blunders that entrepreneurs tend to make, which ultimately puts the proverbial nail in the coffin for their business.
1. Undercapitalization
This is like building a Boeing 747 airplane and leaving the tail and wings off. You may be able to get going, but without the wings and tail you may never get off the ground. I see too many businesses begin with very little capital and fall heavily reliant on debt with no alternate sources of equity. Without sufficient capital behind your business, you will fail. You must have enough liquid capital (cash) to sustain the starting and growing phase of your business.
Now this doesn’t mean that you have to raise or have tons of money in order to start, instead you should become well informed of the average capital requirements of starting a business in the respective industry as some industries are less capital intensive than others. For example, a microchip manufacturing company requires a lot more capital and infrastructure (machines, employees, factory and land) than let’s say a flower store. The differences are obvious but people still tend to underestimate how costly things can really get.
2. Not reinvesting early year profits to achieve stabilization
Another observation I have seen over many years is that all too soon, after a business starts to gain momentum, business owners want to upgrade their personal lifestyles (fancier cars, bigger houses, more holidays etc.) and not take those profits and reinvest them in the business in order to secure its long-term performance and future. In effect, business owners strip away the businesses’ precious resources that could be used for vital operations, or expansion and instead treat themselves as if their job is done.
The reality is that the most important and sensitive part of a business’s’ life is during its growth phase. By sapping and extracting the capital out of their business, they are effectively putting the business on life support at the most crucial time. Remember, there is a fine line between paying yourself; the business owner and gratifying yourself prematurely. I like to implement the old adage “every dollar saved is a dollar earned” in all aspects of my life.
3. Expanding too soon
This concept took me a while to understand as to why expanding a business could be a bad idea. I mean is this not what the nature of business ought to be? What I have found is that expanding your business before it has the key resources (cash, access to equity, access to credit) or key structures in place (key staff or management, well entrenched business systems, secured supply lines in place) can lead to disaster.
Don’t underestimate organic growth. It may appear slow at first, but it is solid and sustainable growth. I would argue this is the best kind of growth any entrepreneur can ask for (even better than rapid explosive growth)
4. Chasing turnover at the expense of profits
I have seen this many times in industries that are highly competitive (i.e., construction). Businesses that chase turnover “just to keep the boys employed” can lead to business failure, unless you are properly capitalized to weather the shortfall in work until more profitable contacts emerge.
Take for instance employee costs; what some small and medium sized enterprises (SME’s) fail to realize is that employing staff incurs many costs beyond just the wage/salary that are not obvious (accrued annual leave, accrued long services leave, leave loading (extra money when you take holidays), workplace injury insurance, payroll tax, to name a few). Such costs can be overlooked when pricing a job.
5. Failure to seek (and implement) proper advice
Many SMEs subscribe to the thought that they want to do things their way. This mindset of course has merit and is an obvious driver of commerce in an economy. After all isn’t going into business about taking charge of key decision making?
Yet there are many times when not seeking advice from someone with a different perspective, or someone that is very knowledgeable in business transactions (accountants, lawyers, financial planners, strategy experts) can be extremely costly. Good business owners that I see always seek counsel from someone with a bigger perspective and surround themselves with the right people and advisers.
6. Failure to deal with people
If people don’t like you, they won’t do business with you. Regardless of your personality type, it is a must to learn basic people skills. Without it, you can be ‘Hung by the Tongue’. This goes the same for dealing with your staff (who are your biggest asset) as they perform the tasks that business owners don’t want to do, or shouldn’t do on the quest to grow your business.
7. Not setting up the correct business structure from inception
This is shortsightedness and failure to begin with the end in mind. The excitement of getting things going as soon as possible leads people to take the path of least resistance, precisely at the wrong time. A good accountant or lawyer will be able to advise you of the best way to structure your business to achieve your business goals. It may initially cost a few thousand to get this right, but it is one of the best insurance policies you will take.
Understanding the pros and cons of being a sole proprietor, incorporated company, and limited liability partnership is vital to know at the beginning of a business’ life. Good accountants and lawyers know this and will guide you here.
8. Failure to adapt to change
There have been many multi-generational companies (i.e., companies that were handed down from father to son, or grandfather to son to grandson), with the newer generation failing to adapt to the changes in their industry. Instead, they adopted the thinking of the previous generation which is: “that is how we always did things“.
Now with the rise of the digital age, businesses that fail to embrace technology or to see how to exploit it in their business are falling behind. Needless to say, you should do everything in your power to implement current and efficient processes and methods of conducting business with your clients.
9. Taking on too much work
Many major business failures have occurred as a result of taking on too much work. This is likening to promising too much and delivering too little. It may seem weird that taking on more work than you can handle could be a bad thing, but this can really get you into trouble. You may have a short term win when you eventually complete the work, but if it is not up to par and quality expectations, then it will be at the expense of long term repeat referral work.
Not to mention the impact on any staff and team members working under high stress to complete the work. I have seen some restructuring occur where the company had to strip the business back to its core offering in order to survive, which did mean reducing the amount of work taken on.
10. Reliance on one key customer
This can be deadly, especially if that one key client is the government. This is because a change of government or government policy can mean the end of your business. Outside of government, if your one key customer fails in their business dealings, it is almost inevitable that you too will fail.
It’s no wonder that business analysts see reliance on one key customer as ‘high risk’. Even when valuing a large multibillion dollar company and their stock price, my team and I make sure that they are well diversified when it comes to their user base and customers.
11. Greed
You could paint a brush across many business failures as being attributable to greed. Greed could be encompassed in a number of forms; treating the business as a personal piggy bank; fraud by top level management; avoiding simplicity and consistency when it comes to business; or simply, aiming to land a job or client that is well outside the capability and available resources of the business.
Over extension due to greed places undue stress on the business assets which may lead to ultimate failure. Of course this does not mean that you do not take chances or expand your horizon, but more so that you do so on your own terms and after analyzing all the angles.
12. Naivety and stubbornness among management
A lot of business failure can be put down to a breakdown of relationships between the key managers of an organization. This can include disputes between the owners, founders, family members, partners, the list goes on.
Good businesses have agreements between those actively involved in the day to day management – it is important to have those agreements and terms outlined from the get go in writing. I often say that these agreements are not there for the good times; instead they are there for the bad times.
13. Failure to prepare a business plan
Again this comes back to the “beginning with the end in mind” principal. A business plan prepared prior to starting up a business makes you think about all the areas of the business and plan for those outcomes. Planning and mapping out the process will provide clarity and a sense of urgency to achieve your business goals.
We don’t plan to fail, but we do fail to plan. There is a direct nexus and correlation between businesses that fail and the lack of business planning. Do not be intimidated by a business plan, it does not have to be 50 pages long with complex jargon (unless it is for the banks). I recommend making it to be as simple and easy to follow and refer to as possible, if that means it is one page long, then so be it.
14. Not looking at the important numbers
Cash flow is vital for all business operations. I liken cash to blood within our bodies. When you run out of blood, you die. It is all very good to have swelling sales and revenue numbers, but it is not good if those sales don’t convert to net income and profits in your bottom line. Do not get caught up in sales numbers only, for there have been plenty of businesses that have had 7-figure and up in sales/revenue yet ended up losing money with a negative net income.
What would you rather have, a business that makes $1 Million in revenue and $500,000 in net profit (revenue – (cost of goods sold + operating expenses)) or a larger $2 Million in revenue and -$100,000 in net profit?
15. Inexperience causing people operating a business
I have often thought that potential entrepreneurs and business should go through a training and assessment program before entering into business. There is a ‘Grand Canyon sized gap‘ between being an employee, mastering your trade craft and becoming a business owner. Those skills are mutually exclusive.
You could almost always be better off putting an experienced business person in charge of a plumbing business, rather than having an experienced plumber in charge of that same business. It is said that a business is only as good as its weakest link, and if the business owner is that weakest link, then even the most promising of ideas will fail under such management. This is why it is imperative for every entrepreneur to continue to grow, learn and develop their skill set.
I hope that my findings from the speaking and consulting many different businesses has provided you with a level of insight and clarity on what you should and should not do as an entrepreneur. Remember, every entrepreneur has his or her weaknesses; yet in developing their strengths and minimizing their shortcomings can they realize their true potential and become successful entrepreneurs.
