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The Classic Mistakes That New Business Owners Make

By November 17, 2014 No Comments
The Classic Mistakes That New Business Owners Make

Business Owner MistakeHave you ever found yourself thinking: ‘I wish I knew then what I know now’? Most business owners do. For those running their first enterprise the lessons come thick and fast, as they discover the hard way how to juggle responsibilities, while keeping the business afloat, and preferably in profit.

There are some classic errors that rookie entrepreneurs often make in those early months and years. And even established firms are not immune to perpetuating bad habits. Clive Lewis, head of enterprise for the Institute of Chartered Accountants for England and Wales, provides professional counselling to businesses at events organised by Enterprise Nation, the start-up organisation, and he hears the same issues coming up time and again.

“The problems that people experience often depend on an individual’s personality,” Lewis says. “But, there are some typical mistakes that many business owners unwittingly make early on that could be easily avoided.”

Being too risk averse

More experienced SME bosses often say that, looking back, they were too cautious in the early years of running a business. In particular, it can be tempting to stick with a narrow range of products or services – those that you originally set out to provide – even though the market is saying it wants something different.

Lewis adds: “Many firms want to stick to their original business model, even when they realise there’s demand beyond what they’re offering. Often, it’s because money’s needed to broaden a product range, and business owners are reluctant to find the funds.”

Companies shouldn’t get stuck in a rut, Lewis believes, or they might damage the business by not keeping up with the times.

“Always review your operations, and ask yourself what’s working and what’s not,” he comments. “You need to be aware of medium and long-term trends in your industry, and be prepared to change direction. The alternative could be finding yourself out of step with the competition, and, ultimately, out of business.”

Don’t ignore the admin

It may seem boring, but handling paperwork is a necessary part of running a successful business. Too many newly-founded companies neglect their administration in favour of the more interesting and seemingly pressing aspects of the enterprise. Lewis says: “Lots of start-ups spend the first year establishing the business, and winning their customers, but think that the basic administrative issues can wait. The truth is that the longer you leave it the worse it can get.”

In particular, a surprising number of entrepreneurs fail to keep on top of their accounts at the outset. A simple place to start, Lewis insists, is deciding whether to opt to keep manual records, use spreadsheets, or invest in accounting software.

“Being in control of your accounts means that you can tell how the business is doing,” he explains. “You should be able to see what your gross margins are, know your profit and loss figures, and identify individual costs.”

Recent advances in technology have made maintaining accounts easier than ever. Lewis continues: “With the advent of cloud accounting you can get a system that allows you to keep basic records very easily, which means your accountant could just handle the management accounts. I understand that new businesses want to keep their cost bases low, but in this case it can be a false economy. It’s possible to get up-to-date accounting software packages for as little as £30 or £40 a month, and it means you can keep absolutely up-to-date, recording your business transactions properly.”

Getting inventory right

Another challenge for new businesses is knowing how to calculate stock, avoiding being landed with a lot of unwanted merchandise that is a drain on the business – and takes up valuable storage space. Lewis observes: “It can be a disaster cashflow-wise to have money tied up in slow-moving stock, or items that aren’t moving at all.”

Again, the best advice is to have decent systems in place to monitor where sales are focussed, and, also to identify early which product lines are less popular with customers.

“Have a good computing system to maintain up-to-date records of what’s being used, and at what rate. The important thing is to keep track of things,” he says. “A small corner shop can see the stock on the shelves, and it’s clear when things are being sold, and when they’re lingering. For a larger enterprise with a diverse product range it’s not possible to use that sort of visual check, so get the necessary software to keep on top of what’s selling and what’s not.”

Don’t be afraid to seek funding

It’s still the case that too many small businesses, particularly newer entities, are reluctant to borrow money when they need it, either to help with day-to-day costs, or to expand their enterprise. Another harsh fact is that under-financed businesses are less likely to thrive, and, indeed, have a greater probability of failing.

Lewis comments: “A classic mistake that SMEs make is waiting too long to ask for finance. Too often, it’s only when they’re desperate that they finally concede they may need extra capital.”

Another problem is that smaller business owners frequently limit their chances of getting funding by only ever turning to their bank for help.

“The default option for many firms when borrowing is the bank,” Lewis adds. “They go in ill-prepared because they’ve left things late, and often they have unrealistic expectations,” he adds. “Many SMEs think they can apply for a bank loan, and get the funds within a week. The reality is that banks often take weeks to decide a loan, and are very likely to turn down an application in the current lending climate.”

Lewis believes that firms should be more organised to recognise they might need extra funds in the near future. They should also be prepared to look around for alternative options to the main banking providers, be that peer-to-peer platforms, asset finance, or short-term lenders.

“As always, cash is king,” he maintains. “You absolutely need to be focussed on what’s going on with the business in the medium and longer term, and what it’s likely to need in the weeks, and months ahead. If you fail to get the funding you need when you need it, the business will be held back. And more firms need to realise that there are growing numbers of alternative funders out there away from the banks.”

Finally, Lewis points out that it can be very helpful and worthwhile seeking out a professional mentor to get advice in those early days of business ownership. He concludes: “Being at the top of a business can be very lonely, which makes having a mentor or trusted adviser all the more important. Find someone who’ll be prepared to tell you the uncomfortable truths, and who has relevant experience to guide you. Everyone makes mistakes, but a good mentor may prevent you from blundering into some of the more damaging ones.”

Image courtesy of stockimages / FreeDigitalPhotos.net

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