How to Avoid the Worst Mistake Business Owners Make

| March 31, 2015 | 1 Comments

An eager start up company is usually driven by the desire to get the product or service out there into the market place immediately. Whether the product took a long time to develop or the service was ready to go on the first day of business, generating income is goal number 1. Yes, that’s great to generate income, but it’s only half of the story. The worst mistake you could ever make is to focus on income instead of net profit.

What this really comes down to is this: does your company have enough capital to survive the initial start-up and run profitably for another 20+ years? Lack of capital is the number one reason businesses fail. David Skok, five time serial entrepreneur turned VC, at Matrix Partners, writes in “Why Startups Fail”:

In the early stages of a business, while the product is being developed, and the business model refined, the pedal needs to be set very lightly to conserve cash. There is no point hiring lots of sales and marketing people if the company is still in the process of  finishing the product to the point where it really meets the market need. This is a really common mistake, and will just result in a fast burn, and lots of frustration.

Though, I would argue, if you had a qualified business idea to start with, you might not have needed so much money. Regardless, you need to determine how much capital is required to operate your business. This is how you know when to slow things down AND when to ramp things up.

I am a big fan of the Know Your Numbers mantra. Based on your budget and your estimate of cost per customer, reconsider every urge to hire. Start by hiring contractors, not full time employees, for piecemeal work. When your cash flow increases, only then should you hire to meet the INCREASE in demand.

However there are essentials that many businesses need before making a profit. The good news is that if you are starting a service business like I recommend, many of these “needs” can be delayed for years. Determine all costs associated with operating your business: rent, utilities, labor, advertising, contractors, supplies, website, loan payments, inventory, etc. This should be an exhaustive summary of what it takes financially to keep your business up and running. Be selective when committing to these costs. You can trim or expand this list later. As a preliminary exercise, though, make sure you list every possible operating expense, including any debt repayments.

Here is a sample list to get you started:

  • Rent
  • Office expenses
  • Utilities
  • Travel and vehicle expenses
  • Advertising
  • Insurance
  • Salary and wages
  • Maintenance and repairs, such as trash removal, janitorial service, and lawn care
  • Inventory
  • Taxes
  • Debt
  • Professional Fees

After establishing your costs, see if there is anything that can be removed. Cheryl Conner of Forbes has noticed that “Lean operations are the name of the game, and the ability to stretch and conserve early stage funds, even if greater funds are available, is a significant sign that points to future success.” Is there any expense that can be lowered by negotiating a better price or better terms? What can be delayed for 6 months, 1 year, or more?

Here is your homework for the week. If you are a new business, do some research and generate a list of the costs above. Then pass it by us here at newBIZcoach or your accountant. Next week, we will have tips on running lean and knowing your numbers!

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