There are mistakes you can make throughout the various stages of growth within your business that can slowly kill it if you aren't diligent with procedures and review your financials regularly.
These mistakes are not only made by new business owners. Many established businesses, including those you might think are “successful” because they’ve been around for many years are often making them as well and are possibly losing a lot of money and/or wasting a lot of time and hindering the growth of the organization.
These mistakes can be made in both service industries and those enterprises selling products to the public. Read on and review the processes within your own organization to see if there are areas that need to be addressed to make your business more efficient and profitable.
Underestimating Project/Service Time
This is a big one and can lead to loss of money in scope creep or just failing to take into account all of the costs associated with a particular job. Many entrepreneurs underestimate the time or materials that go into completing a finished product or service for customers. When estimating the cost of a job, perform the task yourself and then have an employee perform the same task. This will give you a good idea for time budgeting purposes. You should allow for some delays or additional expenses when preparing the final proposal for your client and make sure that your agreement clearly allows for additional billings if unforeseen circumstances cause the project to take more time than anticipated. Be sure to take into account all employee costs when estimating a job as well. Salaries and hourly wages are fairly obvious, but don't forget the employee benefits and payroll taxes that add a significant amount to the true cost of your employees.
Not Knowing YOUR Company Numbers/Incorrectly Setting Prices
Notice the emphasis on the word "your" in this area. It’s a common mistake to use a competitor as a pricing gauge without actually knowing how they calculated their prices. Your competitor may be losing money on one product because they use it to sell a more expensive (and lucrative) product or service. Or they may not be reviewing their financials regularly and may be unaware that they are losing money because they're using loans or other debt to keep the doors open. If you base your business on their failing practices, you may feel like you're being competitive but it may just be a matter of time before you are both out of business. Know your numbers and set your prices to ensure a profit on each sale.
Not Charging For All of Your Time & Costs
This may seem like a no-brainer, but many business owners have given away too much of their time, and hence money, over the years. There is nothing wrong with giving a little extra here and there to show you care. But your time is valuable and limited and you deserve to be paid for it. If you are in a service industry, track your time to ensure you are getting paid for all the services and advice you are providing to clients. If you don't charge for your expertise, clients won't learn to appreciate the services they are receiving and you will resent the time given away and lack of respect that could follow.
If you are providing a service that a competitor doesn't in your proposal or package, make sure to highlight that this is included in the quoted price. And use detailed invoicing at the completion of the job. Clients don't usually complain if they understand what they're being billed for, but memories are short and they may feel taken advantage of if they receive a generic bill "for services rendered" and a flat amount on the invoice. Remind the client of the services you've provided. It may even lead to more conversations and opportunities to provide additional services to the client.
Not Getting Paid Fast Enough
Cash flow issues can hinder the growth of a business and cause credit problems for the owners. It's important to track your time and other jobs that customers need to be billed for and to send accurate invoices in a timely manner.
If you are working on a large project, make arrangements to get a deposit (retainer) up front and then bill for the remainder upon completion of the job, but before delivery of any tangible products. If you are performing smaller jobs, ensure that all agreements stipulate that payment must be made before the finished product is delivered. If you are simply providing services, bill regularly to keep the invoices smaller and cash coming in more regularly. Don't act as a lender for your clients or customers. Their cash flow problems should not become your cash flow problems.
Failure to Have Solid Systems & Procedures in Place
A business will be most efficient and profitable if numerous systems and procedures are in place. Creating good communication and work flow processes will result in more independent and productive employees. You will also find yourself retaining and onboarding more work if customers experience a smooth and timely process.
You should have good procedures in place to track your financials as well. Implement electronic payment methods to get paid faster, set deadlines for getting invoices out to clients, and reconcile and review your financials on a monthly basis. Reviewing your accounts regularly will allow you to make timely decisions and to pivot as soon as you realize costs have increased or your profit margins are down. It's much easier to recover from one month of lost revenue than to make up for 9 months' worth of losses if you don't review your financials until the end of the year.
Spending Advertising Money Just to Say You Advertise
Be selective in your advertising. Many advertising platforms provide analytical tools so you can review the number of views your ad received and the demographics of your audience. You don't have to spend thousands of dollars to reach a wide audience if you are actively tracking your ads. I had a client that was spending about 10% of their budget on advertising each year and was convinced that by utilizing multiple advertising platforms (such as the YellowPages, television, billboards, and online sources) they were reaching a wider audience. They cut back on their advertising and removed some of these platforms altogether. A year later they found that the client base had increased significantly. It was a win/win situation as the owner's revenue had increased while their expenses had decreased. Don't underestimate the value of word-of-mouth and referrals either. They can be priceless.
Spreading Yourself Too Thin
This is a classic mistake made by almost every entrepreneur. Because budgets are tight in the beginning, most new business owners try to wear every hat in order to save money. The key is to figure out when you are in over your head and start getting some help. Know your strengths and focus on performing those tasks as they will bring the most value to the company. If you're not an attorney, accountant, or marketing guru don't try to perform all those tasks. You will cost yourself more in the long run when mistakes are made because you don't know what you don't know. And a professional may be able to complete a task in the fraction of the time it takes you to complete it. This frees up time that you could spend on growing your business or taking some time away from the office.
Not Getting Help Soon Enough
It can be difficult to determine when you should hire someone to help out in the business and allow it to grow. You should first determine if you can afford the extra help. If you feel yourself stretched too thin, but your finances aren't allowing you to hire an additional set of hands, spend some time with your accountant in reviewing your financials. Are you spending time on products or services that aren't adding to the bottom line? Ditch those and focus on the more profitable areas of your business.
If you do decide to hire someone, spend some time determining what role that individual will play and how they can best free up your time and add value to the business. And make sure you are still making a profit at the end of the day. You didn't start the business to simply provide a job for others while you take home a small paycheck. Each member of the team should add to the bottom line and allow you to take a step back from certain duties.
Terri Johnson, CPA
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