Mistakes New Businesses Make

You don't know what you don't know! But in running your own business, you quickly find out what you don't know because it is that very thing that may put you out of business. Here are few ideas and some of the mistakes I have observed or experiences for myself.

Mistake 1

Failing to spend enough time researching the business idea to see if it's viable. This is really the most important mistake of all. Experts say 9 out of 10 entrepreneurs fail because they're undercapitalized or have the wrong people. I say 9 out of 10 people fail because their original concept is not viable. They want to be in business so much that they often don't do the work they need to do ahead of time, so everything they do is doomed. They can be very talented, do everything else right, and fail because they have ideas that are flawed. Defining the business is an important task. What is the business you're in rather than what is the product you sell? Making this distinction can open up more of the market place plus open up the products list.

Mistake 2

Miscalculating market size, timing, ease of entry and potential market share. Most new entrepreneurs get very excited over an idea and don't look for the truth about how many people will want to buy it. They put together financial projections as part of a presentation to pump up their investors. They may say, that the market size is 50 million people that could use this product, and if I could only sell to 2 percent of them, you could be selling a million pieces. But 2 percent of a market is a lot. Most products sell way less than 1 percent to a given market segment. The business-to-business market is even smaller and tougher.

Mistake 3

Underestimating financial requirements and timing. They set their financial requirements based on Mistake 1, and they go ahead and make a commitment to this much office space and this many computers, and hire a vice president of sales, and so on. Before they know it, based on sales projections that were wrong to start with, they have created costs that require those projections to be met. So, they run out of money. Growing a business is like growing a plant. Too big a pot and the plant will fail?.wait until you need what you need then move forward. Too much too soon and you can run out of capital to fund the growth. Slow and steady is better.

Mistake 4

Over projecting sales volume and timing. They have already miscalculated the size of the market. Now they over-project their portion of it. They often say that there are 200 million homes, and I need to sell to x number of them. When you break it down, though, a much smaller number of those are sales prospects. That makes it impossible to make their sales projections. A better approach is, can I make this sale to this customer today rather than jumping ahead. Of course, working on a particular market segment is not a bad idea, but don't think you can sell the whole segment just because a small percentage of that market has purchased your product or service.

Mistake 5

Making cost projections that are too low. Most cost projections are always too low. Part of the reason is that they project much higher sales. There are also unknown reasons that always come out that usually make costs higher than planned. So on top of everything, their margins are now lower. It is best to make sales projections much lower and costs much higher and lower costs long before you have to lower your sales projections.

Mistake 6

Hiring too many people and spending too much on offices and facilities. Now you have lower sales, higher costs and too much overhead. These are the things that you see every day in companies that fail. And they all grow out of that first mistake: failing to research the size and viability of the opportunity. Dreams are good, but don't borrow money, hire people or make long-term financial commitments based on "pie in the sky". Let time and steady growth get you to the point you want to be.

Mistake 7

Lacking a contingency plan for a shortfall in expectations. Even if you're realistic in your estimates to start, there are things that happen when you start a new business. Your sales ideas may be no good; bank rates may go up; there may be changes in our target industry, etc. These aren't the result of poor planning, but they happen. More often than not, entrepreneurs just feel that something will come along when they need it. They don't have contingency plans for it not working out at the size and time they want. When times are good, put that money aside for the rainy day that will most definitely come.

Mistake 8

Bringing in unnecessary partners. There are certain partners you need. For instance, you often need money, so you're going to need money partners. But too many times, the guy with the idea takes on all his friends as partners. Many people don't provide strategic advantages and don't warrant ownership. But they're all going to get 25 percent of the company. It's totally unnecessary, and it's a mistake. Before people are made partners, they have to earn it. Don't move ahead until the money is in the bank. People will make big talk about investing but may never come up with the money. Plus, be very careful about giving away that good idea to so many people who don't have the same drive, love or dream about the business. They will be just as quick to cut and run for a quick short-term profit rather than hang in there for the long-term income you may be looking for.

Mistake 9

Hiring for convenience rather than skill requirements. Many are in their first business, hired relatives or their best friend. It was easy to do, but in many cases, they were the wrong people for the job. And it's hard to fire people, especially if they're relatives or friends. More time needs to be spent handpicking people based on skill requirements. You really need super-skilled people who can wear more than one hat. It just bogs you down when you hire people who are friends and who can't do the job.

Mistake 10

Neglecting to keep a view of the company as a whole. You see this happen all the time. They'll spend half their time doing something that represents 5 percent of their business or part of their business that doesn't make them money. You have to have a view of your whole company. But too often, the person running it loses that view because they hang on to administrative tasks that should be farmed out. They get involved in a part, and they don't manage the whole. Don't get stuck in doing administrative tasks that don't impact the bottom line directly. Delegate those tasks but monitor them periodically for a view of the whole picture.

Mistake 11

Accepting that it's "not possible" too easily rather than finding a way. I know an engineer who was a very good engineer, but with every new concept we developed, he would say, 'You can't do it that way.' I had to be careful not to accept this too easily. I had to look further. If you're an entrepreneur, you're going to break new ground. A lot of people are going to say it's not possible. You can't accept that too easily. A good entrepreneur is going to find a way. Think outside the box. Get ideas from everyone.

Mistake 12

Focusing too much on sales volume and company size rather than profit. Too much of your management is often based on volume and size. So many entrepreneurs want to say 'I have a company that's this big, with this many people, this many square feet of space, and this much sales. It's too much emphasis on how fast and big you can build a business rather than how much profit it can make. Bankers and investors don't like this. Entrepreneurs are so into creating and building, but they also have to learn to become good businesspeople. Cash flow is king when it comes to stable growth. I would be much more likely to invest in a business that has a solid and consistent profit margin than one that is loosing money but growing by leaps and bounds. Growth without profit is doomed to fail. You need to know what your profit margin is on every transaction so you will know what are those events that produce the most profit. Some products may produce more manpower requirements or more assistance that is technical. Others will not require much work at all.

Mistake 13

Seeking confirmation of your actions rather than seeking the truth. This often happens: You want to do something, so you talk about it with people who work for you. You talk to your family and friends. But you're only looking for confirmation; you're not looking for the truth. You're looking for somebody to tell you you're right. But the truth always comes out. So, we test our products, and we listen to what the testers say. We give much more value to the truth than to people saying what we're doing is great.

Mistake 14

Lacking simplicity in your vision. Many entrepreneurs go in too many directions at once and do not execute anything well. Rather than focusing on doing everything right to sell to their biggest markets, they divide the attention of their people and their time, trying to do too many things at one time. Then their main product isn't done properly because they're doing so many different things. They have an idea and say they're going to sell it to Wal-Mart. Then they say they're going to sell to the product to some other big named company. And then some other market looks good. And so on. Focus on getting one market stable and working well. It's like spinning dishes on sticks?.you've got to get the first one going before you move on?..too many dishes spinning and some are going to fall off the sticks.

Mistake 15

Lacking clarity of your long-term aim and business purpose. You should have an idea of what your long-term aim is. It doesn't mean that won't change, but when you aim an arrow, you have to be aiming at a target. This concept will often come up when people ask 'How do I pick a new product?' The answer depends on what you're trying to do. If you're trying to create a multi-million-dollar company with this product, it may not have a chance. But if you're trying to make a $500,000 company, it can work. Clarity of your business purpose is very important but is often not really part of the thought process.

Mistake 16

Lacking focus and identity. This was written from the viewpoint of building the company as a valuable entity. The company itself is also a product. Too many companies try to go after too many targets at once and end up with a potpourri rather than a focused business entity with an identity. When you try to make a business, it's very important to maintain a focus and an identity. Don't let it become a potpourri, or it loses its power. For instance, you say, 'We're already selling a lot to XYZ, company, so we might as well make a new product because XYZ buys from us.' If you do that, the company becomes weaker. A company needs to be focused on what it is. Then its power builds from that. Are we a testing company or consulting company? Are we a culture change company or are we just selling HR services? These are not just academic questions. They are central to the future success of the company if it is to become a brand within a market segment.

Mistake 17

Lacking an exit strategy. Have an exit plan, and create your business to satisfy that plan. For instance, I am thinking I might run my new business for five years and then get out of it. I think it's an opportunity to make a tremendous amount of money for five years, but I'm not sure whether it's proprietary enough to stop the competition from getting in. So, I'm in with an exit strategy of doing it for five years or so and then winding down. I won't commit to long-term leases, and after two or three years, we'll start watching the marketplace very closely and start watching inventories.

Simultaneously, I will keep the option open to sell it in case I can't get something more proprietary. That means I won't sign international agreements that would kill any opportunity to sell it to a multinational. I will make sure that the copyright work is done properly. And I'll try to make sure product development is up to the standards of any national company that I might try to sell it to.

Another exit strategy can be to hand the company to your kids someday. The most important thing to do is to build a company with value and profits so you have all the options: Keep the company, sell the company, go public, raise private money and so on. A business can be a product, too. But is you have been sloppy in the details, then you lose the company as a product because of the legal problems that develop.

Mistake 18

Failing to keep good records. Many new business owners fail to establish systems for records keeping and get into trouble with customers, IRS, government agencies, investors and others because they failed to keep good records. It is vital to setup a record keeping system and use it. You can expand it, or add to it, but have one. If you are dealing with large companies as your customers, they will be keeping good records and will expect the same from you. Contracts, payment records, billing records, employment records, etc. need to be maintained accurately. Make certain that someone other than you knows where everything is kept. For some records, you need copies kept at a separate site. Think about what would happen to the business if a fire destroyed the office. What would you need to start back up again? Keep some records at your house or off site. Someone other than you needs to also understand the system and know where everything is kept. Though you maybe young, something could happen to you. Can the business survive you? For how long?