03 January 2006

The Biggest Mistakes People Make In Starting A Business

Illustration by Scott Menchin

• The single biggest mistake that people make is not picking the right business. Take your time. What is said about real estate—”There is no such thing as the last great location”—also applies to business: There is no such thing as the last great opportunity. If there is a business for which you have special insights that will give you a competitive advantage, it would be a mistake not to include it at the top of your list of businesses to evaluate for yourself.

• Don’t depend entirely on outside resources to furnish the money to start a business. The first resource should be your own personal savings; if you haven’t started already, start now to begin saving cash. And when you do ask someone for money, be prepared to provide a comprehensive business plan that includes your source and schedule for repayment.

• Many entrepreneurs rush into a business prematurely. If you are working in a job, don’t quit your job until you are fully qualified and prepared in every respect to start your business full time. Or perhaps better still, start your business part time without quitting your job.

• Many start-ups make the mistake of not seeking advice from others. People like to talk about their businesses—don’t be afraid to ask questions. Gain the advantage of learning what the worst problems are based on the experience of those who have been there.

• It is a mistake not to have a lawyer when signing a lease, a partnership agreement, a franchise agreement, or any other important document. Remember that when you agree to a five-year lease for $1,000 per month, you incur a liability of $60,000.

• Would you engage in a sport without knowing how to keep score? Think about how big a mistake it would be to risk your assets on a business without knowing about accounting and cash flow. Your business will be judged by your financial backers on classic financial measures: the balance sheet, the profit-and-loss statement, and the cash-flow statement. Your ability to be able to predict future liquidity through cash-flow control is essential.

• Don’t fail to exercise rigid internal financial controls. Your goal is to make sure that your business receives all of its income, without any of it being siphoned off by waste, fraud, dishonest employees, or simple carelessness. And while you need to learn to delegate responsibilities to your employees, do not delegate to anyone the authority to sign checks or even purchase orders.

• It is a mistake to begin expanding a business before establishing a stable and profitable operation. Carefully work out the problems, including achieving a money-making model from which to expand. It is a good idea to test-market your product or service on a small scale first. As you expand, create cash incentives for your managers that are based as much as possible on their own individual contributions to profits rather than incentive compensation based on the company performance as a whole.

• Many entrepreneurs fail to take prompt action when major business problems or recessions occur. When you experience business downturns (and you will), identify and acknowledge your problems and don’t hesitate to cut costs promptly in order to maintain a positive cash flow. Also, look for opportunities in adversity: When your business is in a recession, your competitors are struggling too, and some may be for sale at bargain prices. Remember that businesses have cycles; stick to the business you know best and ride out the adverse periods.

— Phil Holland

From the January 2006 edition of eJournal USA.