The smartest entrepreneurs still do all the dumb things. Here’s a list – and the lessons.
Tougher times are coming. Australians have enjoyed boom conditions for more than 15 years and there is little doubt change lies ahead. But tougher conditions can be the making of an entrepreneurial venture. Belts are tightened, focus is unwavering and staff are more loyal as jobs are harder to find.
But tough times can also trip up the unwary, especially less-seasoned entrepreneurs who have become used to boom conditions.
The Australian Taxation Office has also signalled a big crackdown this year on tax and overdue tax, on the back of the news that 600,000 small businesses owe the tax office $6 billion. See Tax man stories.
So with tougher economic times ahead, the taxman flexing his muscles and a possible change of government, it is time for some thought on risk management. Think very carefully about where your business is going and what might cause problems.
Here is some help. Kosmas Smyrnios and I have spent more than 20 years studying high-growth entrepreneurs, including the blunders they make and their near-death experiences.
Smyrnois says the pace of change is so fast-moving that many entrepreneurs can be brought down by seemingly simple mistakes. “The smart ones know this which is why we are seeing the huge jump in the number using advisers, better lawyers and accountants, and business coaches and mentors providing advice.”
So here are the top blunders that entrepreneurs make.
While they have taken the business perilously close to disaster, they also teach the entrepreneurs valuable lessons and make the company far more resilient.
1. Using the taxman’s money to fund your business
A new business can be trading profitably through to the second year and build up cash funds. Wow, the business owner says. Cash in the bank. So the business owner will decide to run a new marketing campaign, invest in new stock or take on new staff.
However, tax on the first year’s profit is not payable until after the end of the business’s first financial year. For example, if the tax return for the first year is lodged in March of the following year, the tax assessment does not have to be paid until April of the second year. But income tax for the second year of business has to be paid based on the first year’s profits. So, for many SMEs they feel like they are taxed for two years on one year. And they are often unprepared when they get that bill.
2. Dipping into business funds to finance your personal life
Want to make life easier? Keep a strict boundary between your personal finance and business. Entrepreneurs who use their company to fund their personal lifestyle open a pandora’s box, from creating difficulties with accounting and monitoring business results to landing in jail. Canadian Conrad Black has landed himself in hot water by allegedly diverting funds from Hollinger International to fund a lavish lifestyle.
3. The cash stops flowing
Running out of cash when a business is growing is the most common cause of distress and often failure. Lack of resources means that no one chases debtors hard enough and late payments by big business can be devastating. Cash held unnecessarily in stock can also drain its lifeblood. As conditions toughen, entrepreneurs must be increasingly wary of bad debts.
The biggest problem lies often in the first two years: there is so much pressure just to survive and it is impossible to hire staff to ease the pressure. Often entrepreneurs are shocked when the bank forecloses. Guy Sigston, who ran recruitment company Lloyd Morgan International, learnt this the hard way after the bank foreclosed on his business. He recovered and went on to sell the business for $11 million. “But I learnt that the balance sheet must always be strong.”
4. Loving just two clients to death
Entrepreneurs are great at relationships and short of resources. So it makes sense to build up a few major clients. But it leads to certain death as clients move on, pay late or complain of poor work and insist on part-payment. No one client should be responsible for more than 30% of total revenue.
5. Not ditching demanding, profitless clients
Entrepreneurs can pursue clients for months and then still find out they did not win the tender. They also can stick to clients they should ditch out of fear that any money is good money. It is not. Focus on the money you will make from each sale. Know your margins and cost of resources so each sale is profitable. Cull your unprofitable clients with a nice letter suggesting a new service provider. And look for better clients before you discount.
6. Losing a key staff member
No way around this one. When a key staff member leaves it can damage a business. But make sure information is documented in a business and have correct checks in place to stop employees stealing information or clients when they leave.
7. Failure to execute the business plan
Many businesses look great on paper but the entrepreneurs are poor at execution. They lose focus, get bored, find a better idea or lack the business knowledge to develop the business.
8. Bad at business
Business owners often excel at their passion. But they might have limited business knowledge and not understand their own strengths and weaknesses.
All entrepreneurs should have some knowledge of selling, marketing, law and accounting and market dynamics.
9. Choosing the wrong staff member
This can quickly destroy a company: general managers who turn out to be thieves; sales directors who hate cold-calling – so the list goes on. Smart entrepreneurs talk of hiring slowly, firing fast.
10. Outgrowing office space too soon
It might not kill a company, but moving office is a huge distraction. And the biggest mistake entrepreneurs make is not moving into offices that are big enough so they find themselves quickly moving again.
11. Not adapting fast enough to changing technology
Entrepreneurs who relied on having better technology than their competitors find that changes are too rapid and expensive for them to keep up. They then watch a new competitor come in with the latest technology and gain an edge.
12. Getting caught in the day to day administration and not planning from a strategic level
Growth can not be sustained if there is no strategic focus.
13. Burning through too much money
Some entrepreneurs mix business and personal finances. This is a real problem in boom conditions and entrepreneurs are going to have to get used to more belt tightening.
14. Failing to seek the best advice from professionals
Business is so complicated and many businesses find their expansion hampered by having the wrong business structure or poor planning advice, particularly at start-up.
15. Not having adequate systems and procedures in place and then winning a big order
Then not spending enough time to hire the correct subcontractors.
16. Assuming the market understands your product
Many innovative entrepreneurs make this mistake. They are so focused on the technical aspects they forget to highlight the product benefits. They also underestimate the amount of education that the marketplace needs – and it might be years!
17. Getting too far from your investment
As companies expand overseas the entrepreneur often loses all the checks and balances available in the home office. Many come undone by using distributors and others who do not have the culture and high standards of the home office. Either send people from head office over to run the office or bring people back to Australia for training. And visit regularly.
18. Lack of appropriate insurance
It is astonishing how many companies experience fire and theft – and how many have told us they were not covered adequately. Juice company Nudie was in the throes of massive expansion when its factory was burned down severely. Founding managing director Tim Pethick immediately turned it into a major marketing exercise with its little Nudie figures wearing fireman hats and begging the community for support. But the fire was a major setback.
19. Failing to understand Web 2.0
A recent SmartCompany/Roy Morgan Research survey showed that 49% of SMEs believed Web 2.0 would affect the way they do business next year. But that also means half do not. There is a growing divide between companies that understand how internet services are handing back power to the people and those that don’t.
The changes online are affecting offline companies as people increasingly want products and services closely tailored to their personal needs. Adapt or beware.
20. Ignoring new internet marketing methods
Even a few years ago the internet was a tool. Now it lies at the heart of many smart businesses, acting as a powerful sales lead generator, an e-cash register, a marketing and recruiting tool.
The internet gives smart companies the marketing clout of a much larger company. Many use search engine optimisation, which helps their site rank well in search engines and they use paid search, buying key words. SmartCompany50 award winner Atlassian Software, for example, has no sales force, relying entirely on online marketing to generate 80% of sales.
21. Not keeping up with the latest business tools
Wireless, broadband and BlackBerrys are just standard tools of the entrepreneur’s kit. It is not just that they connect the entrepreneurs 24/7. But they also introduce the entrepreneurs to the current generation of tools which assist productivity, cut costs and enhance communications with customers and staff. Experts in the current generation of tools then find it easy to migrate quickly to the next generation and therefore never fall behind.
22. Ignoring the old – and all their money
Companies can fail because they ignore changing demographics. The marketplace is being defined into three distinct groups: Gen X, Gen Y and baby boomers. At one end you have a very young cohort who are completely internet savvy and at the other an aging cohort with loads of money.
Yet many companies miss major opportunities to grow through targeting new markets.
23. Not embracing globalisation
Companies that fail to monitor competitors coming in from overseas are often caught unaware. Smaller businesses are also reluctant to acknowledge how much business their customers are doing offshore and wonder why their sales are falling but deny it is because their former customers are getting better prices and service overseas.
24. Being paralysed by being a perfectionist
Many entrepreneurs are obsessed about getting things perfect. This prevents them doing as many things as they could. It also stops them delegating and driving their staff nuts. Understand you will make little mistakes every day, that you learn from each mistake and try something better next time.
25. Ignoring the rules
Have compliance programs in place and make sure obligations are met on time so you don’t cop fees with interest.
26. Running out of money
There is nothing worse than a business with loads of potential and no money. Build a good relationship with financiers and don’t be shy about taking on equity partners.
27. No succession plan
Many businesses come unstuck because they have no exit plan or succession plan. Meet with potential buyers, start discussions and plan long before you plan to sell.
28. Bad advisers
While entrepreneurs are increasingly relying on outside advice, they are say their biggest mistake is trusting the expensive advice and not their own understanding of the product and the marketplalce.
So be prepared to examine advice but trust your gut.
29. Setting up offices in other states or overseas too early in the development of the company
This can drain resources and cause a huge loss of focus.
30. Doing business with family or friends
Sometimes this can lead to irreparable harm in important relationships. Avoid it if you can. And if you do the “friends, family and fool money” collection early on, make sure you pay them out as soon as possible.
Smart Company is the leading online publication in Australia for free news, information and resources catering to Australia’s entrepreneurs, small and medium business owners and business managers.
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