Running a business is difficult, unless you’ve tried to start one yourself then you might be naive to think that it’s easy getting clients, and that most entrepreneurs are running their business, cocktails in hand from the beaches of Anguilla – but that’s simply not true. Running a business requires a lot of hard work, consistency and above all; patience, the last of which leads me onto my main point, which is the biggest mistake you can make in business…
The biggest mistake I see business owners make is to take on unnecessary costs that throttle their profits and leave them penniless. From coffee, to branded stationary to a university degree in Music, business owners can spend an absolute fortune on things that do nothing to increase their business’ worth, and as such end up racking up a huge bill that they can’t afford to pay. I’m not saying that you can’t have that white chocolate coconut latte with sprinkles, but do so within your financial means.
The reason why I mention this is because I’ve seen it within businesses that I’ve worked with, but more importantly it’s also a mistake that I made with my own business, but we’ll get to that shortly. It might seem obvious that you need to make more money than you’re spending, but young entrepreneurs sometimes see that as a way of thinking “oh it’s fine, i’ll just sell more to make up for it” when in reality it can be very difficult to acquire (decent) clients. Spend within your financial capability and build from there.
Common financial mistakes you can make in your business
Although it’s simple knowing that you need to earn more than you spend, it’s worth knowing that there’s plenty of ways that business owners can start racking up recurring expenses that they can no longer handle, and that these are several costs that you can avoid or prepare for in advance. With that in mind, let’s get started…
Starting your business with debt
As previously mentioned, I started my business off with some unnecessary costs that came in the form of loans. Without going into too much detail, I used to work in finance and took out a loan to fund a new business venture, only for me to became suddenly ill soon after.
Unable to return back to work I was left with no income and a huge debt to pay, which is why I started my website design & marketing business, however the biggest problem was that for a long time; any income that I had was used to pay the loan repayments, which made it impossible for me to grow the business.
It’s only by sheer determination that I’ve managed to pull through thus far, and I know first hand that it would have been a whole lot easier without those loans around my neck! Likewise it’s my strong belief that you should only go to University if you’re pursuing a career that truly requires it, such as becoming a Doctor, otherwise you’re just taking on a huge debt, pressure and stress which just isn’t necessary.
Failing to track costs
Once you’ve got your business up and running, or preferably before then, it’s important to keep a close eye on your business’ outgoings to assess whether you can or can’t afford upcoming expenses. Failure to track your business’ expenses is a quick way towards bankruptcy and the potential embarrassment that goes with it.
The best way to track your costs is to keep a spreadsheet which tracks your business’ income and expenditure over the course of the week, month, quarter or year. With the use of Excel or Google Sheets, you can identify any costs that can be reduced or removed going forward, as well as plan for any potential business developments that you can afford – that will improve your business’ productivity and sales process.
Pricing yourself out of business
That subtitle might suggest that I’m going to tell you not to be too expensive, right? Wrong. I’m actually going to suggest that you avoid trying to be the cheapest on the market, as it rarely leads to good results – unless you’re Amazon.
The reason why this is is because you tend to attract a certain type of customer or client, who base their purchase purely on price; and not quality. That means that when the next business comes along and undercuts your price, your clients will leave you and go with them instead. Save yourself the hassle and price what you’re worth.
You’ll probably want to price yourself somewhere closer to the market average, at least in the beginning, before you slowly up your prices as your quality of service gets better and demand starts to increase. When you can no longer fulfil the level of demand that you’re getting – up the price.
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Not getting the proper insurance
I know, I know… Getting insurance is just another cost of the business, but trust me when I say that it can save you a lot more down the line. That being said, not all businesses require insurance and as such it might not be any expense to you, however, if you do find yourself in an industry or business that requires insurance then you best be sure that you get some.
For instance if you’re a chiropractor and you’re cracking away at people’s spines, you better hope when you’re insured when you accidentally snap your client’s neck like Jean-Claude Van Damme, actually you might need more than insurance for that but you know what I mean. If you ever find yourself in a position where you’re liable to payout to a client, then it’s going to be massively beneficial to have an insurer do that on your behalf, as opposed to forking out from your business coffers.
Likewise if you’re renting a shop or office and all of your inventory gets burned up in flames, then you’ll likely have the damages paid for by your insurer, but only if your possessions are covered in your insurance contract, otherwise you could find yourself in a position where you’ve got no stock – and no money to buy more stock. Moral of the story, get insurance.
Not accounting for any tax obligations
Before you even start trading, it’s essential that you take note of your jurisdiction’s taxing structure for businesses, and take them into consideration when you’re doing your financial planning & reporting.
Most countries will apply tax as a percentage of your business’ profits, therefore if you’re failing to consider your potential tax payouts when you’re busy spending money left, right and centre, then you may be in for quite a shock when you’re hit with an (unexpected) tax bill that you can’t afford.
There are countries and jurisdictions which do not charge such a tax, and are known as tax havens. One of these being the island where I am from, Guernsey. It’s quite common for big corporations to register their business headquarters in tax havens such as Guernsey, to avoid paying out a large amount of their business’ profits to their respective government, which instead gives them the opportunity to invest the monies elsewhere – such as employing more staff.
Not having a fall-back fund
Following on from the previous point of being landed with “unexpected” expenses, it’s crucial to your business that you have a backup fund that you can rely on when you’re hit with some fees that hadn’t been accounted for. If you’ve run a business for long enough, then you’ll understand that this can be a common occurrence.
Ranging from refunds, to claim payouts to slow periods, there really is no limit to why you might have to dip into your fall-back fund, which is why you need to start building one as soon as possible, to ensure that you avoid the unfortunate event of having to close your business purely because you missed payment.
Despite your best efforts with branding, product design, marketing & sales, failure to manage your business’ costs is a quick fire way towards bankruptcy, and is in my opinion the biggest mistake a business owner could make. It’s something that you should look to learn and improve on even if you’re not a whizkid with numbers. Making sure that you account for local taxation, insurance and running costs are essential when trying to grow a successful business. This isn’t to say that you can never buy luxury things for your business, but you should do so once you’ve earn it!
Do you think that poor management of finances is the biggest mistake you can make in business? Let me know in the comment section below!