If you own a business, you need to be careful.
I was recently speaking at Connie Ragen Green’s Weekend Marketer Live event in Los Angeles and a question came up afterwards about funding to start a new business. I told the person who was asking about my experience starting several businesses but also consulting with many startups. I know many of these mistakes because I made them, others I saw in businesses I was helping. I thought it would be good to share here.
Many entrepreneurs start out in business kind of wet behind the ears. They are full of expectations, excitement, and dreams but little else. They don’t take the time to look at the data surrounding their niche so that they can understand what is truly possible if they work toward it. Some will ignore all the facts that present themselves and walk right into failure. Others succeed seemingly against all odds. I recently reread Bill Murphy Jr.’s excellent The Intelligent Entrepreneur and I was reminded of a concept from Jon Ledecky: DROOM, which means “Don’t Run Out of Money.” (For a good summary of that book, check out this article from Entrepreneur magazine called “10 Rules for Entrepreneurs to Live By.”)
Getting back to it, though, here are some common money management mistakes entrepreneurs make:
- Not Having Enough Start-Up Capital—Many business owners fail to realize how much it will take them to get their business started. They don’t raise enough starting cash and hit roadblocks before they even get off the ground. This is true for micro businesses and big businesses alike. Every business needs some start-up capital; you can’t really start free, and if you think you can it’s unrealistic. At the very least you’ll need to invest time and resources that you already have.
- Spending Too Much Money at Start-Up—Conversely, may people over-invest in their start-up. They haven’t really looked at the big picture and start throwing money at the business without any budget at all. If you are starting a really small business that you believe you can earn a few hundred dollars a week doing, you don’t throw 20K at a website right off the bat. Be realistic about the type of tools you need to experience the success you desire. If you’re not sure whether you should make a big investment in something, email me. Get a second or third opinion. Seriously.
- Not Paying Yourself—Many entrepreneurs start a business, start earning money, and either do not formally pay themselves, or they simply spend what they want out of the business account with no differentiation of what belongs to them and what belongs to the business. Until you can formally pay yourself, it all belongs to the business.
- Not Looking at the Data—All of the above can be avoided by looking at the real data about your business start-up. Don’t spend more money than the data dictates. The things that you study—competition, your audience and so forth, will help you determine the price of your product or service. And how many people are in the audience will dictate how many people spend their money. Most of this can be determined before you even open your doors by asking the right questions and collecting the right data. This was a biggie for me. I hired someone to watch the money because I didn’t think I had the time/expertise to do it myself. That was a HUGE mistake.
- Waiting for Perfection—Whether it’s a website, a book, or other type of product or service, don’t wait for perfection. First of all, perfection does not exist. There is always room for improvement. Due to this fact, if you try to wait for perfection you’ll never launch. Remember, if something is truly wrong you can work on it with future releases of your product.
- Not Knowing When to Walk Away—The concept of sunk costs is often lost on new entrepreneurs. A sunk cost is the money you spent starting the business. When determining whether or not to walk away from a business, you never include sunk costs in your decision. That is money that is gone, that you will never get back no matter how hard you work if the idea turned out to be poor. Learn how to look at the data so that you know when to say when.
- Reinventing the Wheel—If it’s not broke, don’t fix it. Time and again consumers show that they don’t want something they already love made better. (Think about Coke versus New Coke, for example.) The same can be said for online businesses. Many companies have already done studies on what colors of sites work best with various audiences, what type of websites work best with a particular subset of an audience and so forth. Go with the numbers, test small changes, but don’t try to be radical when so much already works fine.
- Not Understanding That Customer Service Is Vital to the Bottom Line—Your customer service ability can make or break you. You may wonder how customer service has anything to do with money management mistakes, but if you haven’t pleased the customer and you offer no customer care, you’ll soon find out that it costs a lot more to keep acquiring new customers than to make the ones you have happy.
I recently tried to get in touch with a locally owned bakery about an event I was doing. I called them and they put me on hold immediately (“Please hold” but not waiting for me to respond). After three minutes I hung up and called back. This time they didn’t even bother with “please hold” before they put me on hold. I hung up, waited a few minutes, then called back. As the guy answered I said, “What time…” and he responded without listening, “Please hold….” I looked at the local bakery’s google page and the customer reviews were trending like this, “This place used to be good…,” and “The food is subpar and overpriced.” I went to Corner Bakery, a national chain, and did business with them.
- Under-Anticipating Response—Nothing is worse than doing a marketing blitz and then finding out that your website has crashed. Be prepared for any major spike in traffic, whether by foot, website, or telephone when you do any type of marketing. Test your websites continuously and ensure that you have the right hosting for the type of traffic you need to make the kind of money you believe you can make.
- Spending before Receiving—Another money management mistake entrepreneurs make is spending money before they actually get it. Just because someone owes you money doesn’t mean they will really give it to you. Be prepared with good billing procedures that your clients understand and respect. Then, never spend a single dime until you have it in your bank account.
Making money management mistakes is pretty much par for the course for any new entrepreneur, but you can avoid huge issues by paying attention to the numbers from day one in a realistic data-driven manner.
My final piece of advice: if numbers aren’t your thing, hire an accountant to keep track of things and explain them. I sit down with my accountant to review the numbers at least monthly. If I don’t understand something or something seems off, I ask and keep asking until I understand what’s going on and what, if anything, I need to do in response to the numbers. It’s your business, and you should do whatever it takes to make it work for you.