Every new entrepreneur gets advice about how to succeed. There are many ways to create a profitable business. There are a few surefire ways to fail. The following are among the most basic, and most fatal errors any new business can make. The bad news is that they will bring you down…the good news is that with a little foresight, they can be avoided.
1. Undercapitalization — the worst enemy of the new business.
Do not start a business without enough capital. This does not mean that you cannot start a business at all, just do it on a manageable scale. Do not spend your last hundred dollars on a nice print for the reception area. In fact, question whether you need a reception area at all! And make sure that you are liquid enough to maintain your business. A start up can be wildly successful, but if starved for cash, even temporarily, it may die. Remember, cash is the lifeblood of business. Make sure you line up sources of cash and credit. Maybe you will never have to use it, but make sure it is there!
2. Avoiding legal risk–Incorporation a must
When you start a business you are putting a lot on the line. Your time, your effort, your money; no one can say there is not a lot at risk. There are ways to reduce your exposure, and you must use them. The first and best insurance policy is to incorporate. By doing this you are creating a firewall between your business and your personal assets. If your business is sued, and you are incorporated, that is as far as it will go (unless there is criminal activity involved.) Incorporating (or forming an LLC) in any state will get you this liability protection, but some states, such as Delaware, are known as particularly corporation friendly. Their laws exist to give businesses a special boost. This makes states like Delaware and Nevada a first choice for those seeking the advantage of incorporation.
3. Failure to “get it in writing”
We would all like to live in a world where things are done on a handshake. Or where strategies can profitably change on the whim of a creative inspiration. The fact is that it is always better to have plans and agreements in writing. For example, your business plan should be your corporate bible, underlying and guiding the direction of your business activity. Agreements, such Operating Agreements (or By-laws) should be formalized and signed by all interested parties. This habit of documenting should be maintained throughout the life of your company, with corporate resolutions authorizing all major actions of the company and annual reports documenting the activity of the company in the prior year.
4. Sloppy Accounting Systems
If cash is the “blood of a business”, then the accounting system is the report card. It tells you not only how well you are doing, but the contributions and costs of all financial elements of the company. There is a temptation, especially when a business is in its infancy, and revenues and outlays are small, to use a “cookie jar” approach to accounts. Money comes into the cash box and is taken out to pay ongoing costs. Anything leftover is a “profit.” Wrong, wrong, wrong! This may leave you liable to tax penalties at worst and at the very least will limit your understand of how your business really works.
5. Careless Vendor Relationships
Good vendors are one of your biggest allies is the battle for business success. Your interests are truly aligned– the more you sell, the more your vendor will sell (to you!) Conversely, bad vendors create only problems, delaying you, or providing you with substandard product. A bad vendor can damage your reputation with your own client. Take the time to know and understand vendors so you can pick good ones. They are a member of your family. And treat them right, with the respect and prompt payment they deserve.
6. Bad Employee Practices
Your employees are your partners in success. An adversarial relationship can only harm moral, your business environment, and ultimately your ability to succeed. As with any relationship, this is a two way street. Employees should understand what their duties are. They deserve courteous feedback on their performance. Employees will be more motivated if they see that they work in a fair company and that they have a path to advancement in both position and salary. Conversely, you have every right to expect your employees to treat their jobs, and the paycheck and opportunities they bring, with appropriate respect.
7. Poor allocation of resources- All resources are scarce
This is obvious about resources such as cash. We tend to think of our time as unlimited. It is actually the scarcest resource of all. With a new business we may often trade our time to save a little cash. Yes, it feels like we are being thrifty when we clean the office rather then paying for a service. It is a totally false thrift. The entrepreneur’s mantra must be “The highest and best use of my time.” And then he must train the staff to think the same way. Efficient workers should always be striving to get rid of the bottom third of their tasks, in order to take on a new top third of challenging tasks.
All of the above are vital errors to avoid. But remember, when you drill down, it is all common sense. And nobody needs an MBA from Harvard, Wharton or Columbia to have common sense.