7 Deadly sins of new businesses
We all know someone who has started a business only to see it fail.
Sometimes this can be just a series of unfortunate events but often you’ll find that the business owner has committed one of our seven deadly sins.
This isn’t a comprehensive list of course but it’s a distillation of the most often seen mistakes that new business owners make.
We’ve also included some tips to help you avoid each of the sins and run a healthy organisation.
Sin 1 -Not having a clear vision
This is probably the most basic of the requirements for running a business and indeed one of the first you need to get right.
You’d be surprised at the number of people who invest a lot of their own money (and often family, friends and the banks too) in their business without a clear idea of what it is they want to achieve.
Think of it like going out on a trip, if you don’t have a destination in mind then the likelihood of you ending up somewhere you’d like to be is slim.
Avoid making this mistake by setting out exactly what it is you want to achieve before you spend any money. Refine it by writing your objective down and getting into one sentence. If you can do that they you’ve got much more chance of getting to where you want to go.
Sin 2 – Thinking they are doing what they do
If you speak to a lot of business owners they express their job as being the thing that they do. So for instance a welder will say they are a welder and a sign writer will say they are a sign writer.
The difference when you go into business is that you are no longer what you do. You may spend most of your day welding or indeed making up signs but you are in fact a business owner.
It’s a subtle difference maybe, but it’s important that from day one you think of yourself as a business owner. This means that in practice you can’t keep yourself busy by welding, you have to deal with the marketing, paying the bills, choosing insurance and any of a hundred different tasks that business owners are responsible for.
This change in attitude means that your horizon shifts from simply producing the best and most creative signs you can to ensuring that you have a strategic oversight of the whole operation.
Sin 3 – Leasing a big car
This is something that you see often. Someone goes into business and then immediately leases a massive 4×4 or a brand new van. They seem to think that because they are in business it is natural that they should have new stuff.
It doesn’t end there though. You’ll see people take on premises that are way too large, take out massive advertisements in trade magazine, buy top of the range computers and any number of cash draining, profit killing alternatives.
From day 1 it’s important to make sure that you are incredibly frugal with cash. Make sure that you understand that the money has to come from somewhere and a single monthly lease payment might not seem too big but you have to make it every month.
Sin 4 – Ignoring the accounts
There’s almost a sense of bravado about being able to say that you work on gut instinct. In fact, there are a number of very high profile business figures who like to pretend that they are flying by the seat of their pants and don’t pay attention to the ‘bean counters’.
The truth as always is a little more complicated than that though.
The simple fact is that the best and most profitable companies have robust financial systems in place and their directors understand fully what’s going on, even if they pretend they don’t.
This is even more important for smaller businesses that may not have large cash reserves to see them through rough patches.
Make sure your accounts are up to date and make sure you understand them. If you don’t want to talk to an accountant, then take a course or go online but get up to speed.
Sin 5 – Mistaking cash for profit
This is a classic mistake that businesses make but one that is relatively easily remedied.
Profit and cash aren’t the same thing and it’s vital that business owners understand the difference.
The easiest way to think about it is in terms of your bank account. You may have issued a cheque (remember them) but it hasn’t cleared yet. Your bank account looks like you’ve got loads of money but in the back of your head you know that actually some of that has already been spent.
On the other hand, you may get a profit and loss report that says you have made a great profit for the year but find that your bank account is overdrawn. In this case you’d be right in wondering where the money went until you realise that actually a large amount of money is owed to the business by your customers.
It’s really important that business owners understand exactly what constitutes cash and what is profit.
Ask your accountant to run through which is which and work together to identify what things in your business affect cash or profit.
Sin 6 – Not getting an independent view
So you’ve got your business idea – it’s the most natural thing in the world to want to tell your family and friends about it and see what they think.
The problem of course is that your family and friends aren’t going to tell you when your ideas stink, because they don’t want to upset you.
It’s only later that you realise that perhaps your motorbike ashtray company has a fundamental flaw.
Make sure that you get independent advice from someone with a business background who will give you the honest low down on your ideas; you could save a lot of heartache.
Sin 7 – Not being sufficiently capitalised
If you want to set up a business, then you have to be an optimist. There will be hard times ahead, times when you feel alone, overworked or underappreciated.
But your optimism will carry you through because you know that in the end everything will turn out Ok.
There is a down side to excessive optimism though.
It comes when the business plan figures don’t add up. It’s clear that there will be a shortfall and there’s no contingency built in.
The over optimistic start-up will just plough ahead believing that things can’t be quite that bad or that ‘something will turn up’.
You can avoid this issue by being strict with yourself when you’re preparing a cash flow and profit and loss for your business plan.
Make sure you answer questions honestly such as whether your figures are realistic and whether you have any plan B.
Also prepare a sensitivity analysis so you are clear about what conditions need to be like for you to survive and thrive.
Having a successful business is incredibly rewarding and fulfilling, owning a business that fails is probably one of the worst things in the world.
Use our tips to give yourself the best chance of getting your new business up and running and keeping it there.