Top 3 Business Blunders to Avoid
Who was it that said, the test of whether you have what it takes to be an entrepreneur is that you must be comfortable with the idea of jumping out of a plane and then making your parachute as you fall? Well whoever said that was nuts. That kind of talk may sound very heroic but it is not practical at all, in fact it’s downright misleading. Today we will learn from some of the common mistakes new entrepreneurs make.
Many entrepreneurs began as high level executives or as expert technicians. This is nothing new but here are some of the entrepreneurial realities that they may not be prepared for:
-inconsistent income regardless of activity level
-lack of support structure
Hands of Time
Let’s go over them one by one.
No, this is not the name of a new super villain or video game. DROOM is an acronym for Don’t Run Out Of Money. This may seem painfully obvious but you’d be surprised how many great companies fail, and how many rather mediocre ones succeed, because of this one factor.
Jill, a successful VP of Sales for a marketing firm, left her company to strike out on her own. Because of her great network, her business was off and running from the start and she expected that to remain the case for the foreseeable future. Accustomed to a comfortable income, she decided to invest in pricey offices and support staff. But once the initial spurt of contracts petered out, our entrepreneur found herself struggling with a cashflow crunch.
George Deeb, partner at Red Rocket Ventures, wrote in Entrepreneur Magazine that “education is the key.” Many entrepreneurs understand the need to raise capital for product and basic operations but underestimate the costs associated with sales, marketing and administration. A solid rule of thumb is to determine your annual operational costs (make an exhaustive list) and then add 15% (fudge factor). Take that figure and divide it in half; that is the minimum amount of freely available cash you must have in reserve before beginning operations.
2 No back-up
We often hear highly productive professionals telling us “never do tasks that are below your pay grade”. That sounds like great advice, but when you are chief cook and bottle washer it is difficult to follow.
When Bill, a well-connected and experienced financial services agent, decided to start his own practice, he was well positioned to prosper. In the beginning, all went well, but as his client base started to mount so did the administrative work. Having been focused on business development when he had been an employee, Bill had failed to appreciate the level of support services his company was providing. In his new venture, he was becoming so loaded down with these tasks that he could not even find the time to start searching for the help he now realized that he so desperately needed.
According to MIT’s Sloan School of Management, an employee can cost a company 1.25 to 1.40 times his or her annual salary when once benefits and employment taxes are factored in. Ask yourself two important questions. 1) can you afford the help? 2) can you afford to not get the help?
Entrepreneurs often overestimate their own ability to invest “sweat equity” into the business. This frequently leads to burn out, lost opportunities and being perceived as a “small time” by the market. A client of mine once told me, “the first person you hire is a good office manager, the second is a good salesperson.” Having the proper infrastructure in place to administer your business’ affairs is critical to growth.
3 Hands of Time
“Sure, I can handle that!” When starting a new venture, entrepreneurs feel under an immense pressure to satisfy their clients, so the word “no” is not in their vocabulary. Although this seems like an obvious recipe for disaster, we see it happen all too often.
Whether it is a poor time management or a scarcity mindset (a good topic for a later post) is hard to say. Research tells us that humans are dreadful at estimating how long complex tasks will take. New entrepreneurs suffer doubly because they face their own insecurity and stiff competition for new business.
Melissa, the founder of a new software programming firm, found herself on the verge of a breakdown. Worried that she was going to displease her clients, she took on every job offered her, often below her usual fee. She found herself shut in and unable to get out and socialize with friends. Eventually she began to resent her clients and found her work to be a depressing chore.
I often saw my father work terribly long hours to get his business off the ground. Entrepreneurs cannot expect to work less than employees do. According to the US Bureau of Labor Statistics, in 2000 the average knowledge worker spent 67 hours a week doing work related activities.
That being said, your time is your most valuable asset. Let’s assume you have adequate support staff in place, so time and account management are the key areas of concern here. Understanding how you perceive time is important to managing it. Some are very linear (through timers) in their perception of time and many are in the moment (in timers). See this interesting Biz Buzz article to learn more. Once you know your own particular style, there are many techniques you can learn and apply to manage yourself more efficiently.
The issue of account management and your rates is another matter entirely. Remember that while it is easy to reduce your prices, it is very hard to drive them back up. Understand your market and what your competition is charging for similar services. By being able to effectively communicate what makes your company uniquely suited to solve your customers’ problems, you will have the confidence to justify your rates.
Entrepreneurship is amazing and can be extremely rewarding for you, your family and the whole community. Save yourself time, money and grief, learn from the well documented mistakes of those who came before you. By having a good understanding of your costs, and having sufficient capital in place, you will be better positioned to structure your company and be free to work on profitable, rewarding projects.