By Brian Hamilton, CEO of Sageworks
There’s no better entrepreneurial teacher than one who’s been in the trenches and survived to succeed. Read our guest post today from a successful entrepreneur who made mistakes and lived to tell the story.
Running a business should earn you an honorary graduate or even doctoral degree given all you will learn. For those just starting out, here are the mistakes you should hear now and avoid:
- Hiring in advance of revenue. There is a common expression: “Don’t count your money until it is in the bank.” There is great wisdom in this. Many times in business, we receive contracts or the promise of revenue. However, there is a major difference between having revenue and almost having it. Until revenue actually hits the bank account, you don’t have it, and you must overcome the tendency to be optimistic and hire too many people before the revenue is real.
- Borrowing money when I did not really need it but when the bank was willing to lend it. Just because a bank is willing to lend you money does not mean you should accept it. The bank is in business to collect interest and not to optimize your financial performance. Sometimes these two goals meet somewhere near the middle, but it is not as often as you might think. It’s not that bankers seek to take advantage of businesspeople; it’s only that their objectives and yours are very different. In general, borrow as much as you need to grow your business.
- Not paying payroll taxes on time. I have known few businesspeople who have completely avoided this mistake, but it always creates unnecessary anxiety. When you pay employees, you collect a portion of their money on behalf of the government. When you hire an employee, you are also agreeing to help them pay their personal taxes, a major responsibility. Here is how this problem crops up: The employer cuts payroll checks but does not immediately set-aside the payroll liability in an operating account that is separate from the account they use to pay other operating expenses. The funds are mingled, and the person running the business has an inflated view of his or her cash balance. One solution is to keep two, separate accounts: one for regular operating expenses and the other for payroll taxes. Another solution is to simply use a payroll service that will give the liability its due attention.
- Pricing too low. Unless you are Walmart or are trying to be, it is almost always better to sell fewer units at higher prices than to sell more units at lower prices. High prices protect your margins and also enhance your brand. Even 5-10 percent price increases can make a significant difference to the bottom line. I believe that, at any given time, 20-30 percent of businesses in a given market cannot possibly make a profit at their current prices—they are simply too low. Price for decent margins, build and protect a real brand, and maintain your customers to build your franchise.
- Permitting accounts receivable. Unless there is a good reason, you should not offer credit terms to customers. When you offer credit, you are now a bank and a service or product provider rather than just a service or product provider. It is rare that businesses fail because of profitability (most entrepreneurs know they need revenues to exceed costs); more often businesses fail because they cannot collect receivables and manage cash. Offer credit only when you must do so, and many businesses don’t need to.
- Counting on one major source of revenue. You should look at your revenue as if it were a portfolio; you do not want all or a majority of revenue coming from one or a few sources. Of course when you start out, you are often so busy serving your first few customers that it is difficult to build other accounts or business. But, with time, you should build alternative sources of revenue, so when major revenue streams die off (which they tend to), you are still building your overall business.
- Hiring too much overhead. People at companies bring in sales, build products, or serve customers. You can justify employees filling these roles. The real challenge is when you hire “overhead” people, who cost the company money but don’t sell or produce anything directly. It is best to keep this cost as low as possible.
- Not really listening: trying to be right. When I was younger, I read many books on entrepreneurship, and I tried to implement the lessons I learned from them—I really tried. However, I was not able to succeed as much as I wanted because I was not willing to listen and learn. I looked and acted as if I were listening, but, down deep, I was more interested in being right and proving people wrong. Now that I reflect on it, my real goal was not to build my business; it was to prove how smart I was (thought I was). I’d like to say that I overcame this mistake through some kind of personal transformation, but I really only learned to listen when I realized I would never attain much success until I was willing to listen to others. You need to surround yourself with people who can help you, and these people will/should be people who won’t always agree with you.
Brian Hamilton is the co-founder and CEO of Sageworks.