For most Australians, the dream seems to be a house in the ‘burbs with a white picket fence, a couple of kids, a new car in the drive way, and a successful business funding it all.
Australian’s obsession with starting a business is only surpassed by the desire to own property.
Both are so engrained in our culture it’s also most a rite of passage.
We’ve all heard the sayings:
‘you won’t be rich working for someone else’
‘the quickest way to get rich is by owning a business’
But my favourite is this one:
‘80% of business fail in the first year’
Which such bad odds, why the obsession with operating a business?
My guess is it’s the challenge, the potential financial rewards, to see if you can actually do it.
That being said, starting a business is not without its inherent flaws.
Having worked with business operators over the last 15 years, you start to see trends and can intuitively tell the likely success rate of the business.
You also start to see the same mistakes made over and over again, so I’ve created this article to help you navigate your business more successfully.
With so many businesses failing all the time, I’ve created this guide to share my thoughts on the common failures encountered by business operators.
So here they are, my tops mistakes I’ve seen business operators make.
Mistake #1: They underestimate how hard business is
In my opinion, starting a business is one of the hardest ways to make money.
While the employee has guaranteed income, the self-employed is always looking for their next pay cheque.
In business, your income isn’t guaranteed. It’s variable, and hotly contested by your competitors.
If you’re on to a good thing, chances are someone will try to do the same thing as you, for slightly cheaper.
Everyday you need to prove yourself to your customers. Everyday is an opportunity to get it right, or an opportunity to lose a customer.
If you’re an underperforming employee, it’s much harder to get rid of you.
Your employer has to performance manage you, give you an opportunity to improve, and comply will all aspects of employment law. To successfully terminate a staff member, especially a long-term employee, is not an easy thing.
All your customer has to do is buy from someone else.
The smallest mistake can cost you a customer for life.
Here’s an example of something I see all the time:
One star review! I’m a local that comes here all the time. I’ve had so many great dinners here but last night, the food was just horrible. The chicken was undercooked and I couldn’t bring myself to eat it. We walked out without finishing our meal and weren’t even offered a refund. Will not return!!
The reason I hate this review is because the reviewer has had so many great experiences at the restaurant, but never took the time to write a positive review.
However, upon one bad experience, a one star review goes up, forever to be seen by potential customers, forever making the business slightly less desirable and future patronage slightly harder.
By the sound of the review, they also didn’t ask their waiter for a replacement meal, or express their concerns to the wait staff. They left in such a rush that the person on the counter didn’t have time to find out if their meals were satisfactory, therefore not offering the chance of a refund.
Even in the restaurant business, your next meal isn’t guaranteed.
The key lesson here is that your income is never guaranteed when you’re in business. Every day you need to prove yourself and the smallest mistake can cost you a customer.
Mistake #2: They try to compete on price
Competing on price is a slippery slope.
Why would you establish a business to make the least amount of money in the market?
That doesn’t sound like an enjoyable way to make a living, and it’s actually detrimental to your overall business success.
Unless you’re a multi-national conglomerate that has the purchasing power of a country, don’t compete on price when selling products. And I certainly wouldn’t compete on price if you’re in the service industry.
Competing on price is not good for you, or your business.
The only thing this does is attract customers that are cost sensitive, and cost sensitive customers are the worst.
All they care about is the price of the product or service and will haggle and negotiate relentlessly to screw you out of your revenue.
The worst part is, even if you get a sale, it’s only because you were the cheapest, not because you added value to their life or offered a better service or product to your competition.
Then, when someone else comes along with a lower price (there is always someone else), there goes your customer.
If you are legitimate about operating a business, you need to think of your business as an entity on to itself so that you can eventually sell it one day.
No one is going to want to buy a business where the customers are all cost sensitive and you make the lowest margins in the industry.
Competing on price is an easy way to grow your revenue quickly. But just because your revenue is growing, doesn’t mean that your business is profitable.
You need profitable growth to scale your business and make all of your hard work worthwhile.
If you don’t achieve profitable revenue, you run the risk of running yourself out of business, and you definitely make it harder to sell your business down the track.
Look I get it. Being cheaper than your competitors is an easy way to sell your services or products. But it’s a lazy way to sell.
I’d recommend you really consider your value proposition and try to offer a premium service or product, that adds value to people’s lives. When you can do that, price will become less relevant.
If you’re in the service industry, think about things that people appreciate. Things like:
Upfront pricing with no surprises thrown in
Guaranteed service standards (same day call back, 5 day turn around etc)
People actually arriving on time for scheduled meetings!
Meeting your customer at their place rather than them coming to you
High quality workmanship
It’s crazy that some of these things are considered good service these days.
Mistake #3: They don’t do the necessary planning
If you’re thinking about starting a business, you should be treating it as one of the most significant and risky events of your life.
Starting a business demands a ridiculous amount of planning. It shouldn’t be an after thought, something you do because you lost your job and want to replace your income quickly.
Remember though, at some stage you have to make a start. All the planning in the world won’t help with the unexpected events that pop up.
Here are some of the key considerations:
How will you differentiate yourself from your competitors?
How much will you charge for each good or service?
How much do you have to sell to replace your desired income?
How long will it take you to achieve your desired income?
What are your costs, both fixed and variable?
How long can you sustain your lifestyle before you have to dip into savings?
What are your savings and how long can these sustain your monthly expenses?
You also need to think about your personal finance situation. What are you commitments (mortgage, living expenses, children costs, car loan repayments) that need to be funded from your business.
How many burgers do you have to sell to pay rent? How many burgers do you have to sell to pay staff?
Don’t under-estimate how much is involved in starting a business.
Mistake #4: Not having your head around the financials
Running a business is completely different to being an employee. When you’re an employee, you do your work, you go home and you get paid.
Running a business is completely different.
Oftentimes you need to buy your inventory in advance, and take the chance you will make a sale in the future.
In the professional service industry it’s not unusual to pay your staff to do the work, raise an invoice a few weeks later and get paid two weeks after that if you’re lucky.
That means you had to fund your staff for the time they prepared the job and the two weeks it took to get paid in advance! Ouch.
In the meantime, there’s bills to pay, rent due and staff to feed.
It’s complex.
So complex that there are degrees and professional qualifications that take years to obtain in order to understand these things correctly. But most small business owners go into business without undertaking basic financial training. It’s not surprising that so many mistakes are made and that the failure rate is so high.
When you’re in business, you need to have your head around the financials.
Mistake #5: They don’t understand the difference between a business and being self-employed
There’s a big difference between being a consultant/freelancer and running a business.
When you are a consultant or a freelancer, you are effectively working for yourself. A business is an entity that can operate without your involvement. This makes it infinitely more valuable.
Even if you are working by yourself, I encourage you to treat your efforts as though you are running a business. By this I mean, treat your business as though you will one day be employing staff. This means preparing procedures now while you are the sole technician. There’s no better time to determine how a job should be done then when you are doing it yourself. This is the perfect time to establish your procedures that your future staff will also use.
If your business can’t operate without you, then you’ve created a job, not a business.
The value of your business is linked to the income generated without direct involvement from an owner.
Mistake #6: Starting the business undercapitalised
Many people go into business under-capitalised, lacking sufficient cash to pay for their living costs while the business gets up and running. Most of the time we under-estimate how quickly we can get things up and running, and therefore start with less cash than needed.
While you’re establishing the business, there’s bills to pay. Business expenses such as rent, software, IT infrastructure, all these expenses will likely need to be paid before you raise your first invoice.
Then there’s the personal expenses…mortgage repayments, food, car loan repayments, school fees.
When you start out undercapitalised, you are more likely to take on customers that aren’t beneficial to your business. You might take on fee sensitive customers, small jobs that aren’t very profitable, or work with people that don’t want to fairly pay your for your services.
When you’re desperate for cash, you may fall into the trap of taking on low quality clients just to make ends meet.
Before you start your business, make sure you have a sufficient cash saved to provide you with an adequate buffer to get your business up and running properly.
Mistake #7: Seeking advice after the business has already been created
One of my biggest grievances in my professional career is that often people will seek advice after the business has been created.
The accountant then has to clean up the mess they have made, which is often more time consuming than getting it right in the first place. The accountant then raises an expensive invoice for fixing the mistakes, the client sees no value and gets their nose out of joint, and chooses not to re-engage in fear of getting a big bill again.
What the business operator is missing is that paying for advice upfront can save you enormously and pay for itself many times over.
Two examples of not receiving advice that I have seen first hand are as follows.
Firstly, the customer structuring the business incorrectly, and therefore not taking advantage of the legal tax benefits available to them. This is usually the error of structuring as a sole trader versus a more sophisticated structure such as a company or a trust.
It’s not uncommon for someone to be earning above $180,000 in their business, paying tax at 47%, when they could be paying 25% in a company instead. For a few grand to setup the correct structure, the business owner is instead giving a tip of 22% to the tax man every year. No thanks!
The other one is someone buying a business without doing the necessary due diligence. I once had a client that didn’t want to pay for a due diligence, only to buy a business that was losing money. The client lost over $200,000 in only a couple of years and narrowly escaped bankruptcy. What a life lesson. He was too motivated to buy the business that he didn’t want anyone giving him an honest perspective on the business.
Mistake #8: They rob their business
So many people go into business just to make money.
Once they start to make some cash, they load the business up with high salaries for the owners and cars paid for by the business. So many owners find a way to eek every last dollar out of the business, and then complain that their business’s cash flow isn’t great.
When you go into business, at least give your business a chance to stand on its own. Don’t rob your business of its cash flow. Instead, pay yourself a market value salary and live off this. It may, happen forbid, mean acting your wage or living below your means.
Mistake #9: They don’t know how to sell
In my opinion, the ability to sell is the most underrated skill in business.
When you’re in business, it’s not just selling to customers, it’s also convincing staff to come work for you, bringing employees on the journey with you.
There’s negotiating with suppliers, organising finance, bringing in investors.
All these things and more require at least some sales ability.
If you’re going into business because you’re good at your job, you likely really need to assess your skillset and make sure business is right for you, because in business, you’ll be pulled in a million and one different directions.
The survival rate for new businesses is extremely low.
In my opinion, business is not all it is cracked up to be. For some, it truly can be a road to riches. For others, it can be one of the most financially devastating mistakes of their lives.
Hopefully this article and the content available from this website can help you avoid some of the common mistakes that first time business owners make.
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