So what are the pitfalls you must avoid in running a business?
1. Lack of planning. You need a track to run on. In its simplest form, you MUST anticipate cash flow (cash in and out) in order to avoid crisis management. This requires the development of plain vanilla projections for at least the next 12 months. These are essentially sales and operating expense estimates. In this regard a wise man once said “The only reason they can take you out of the game is if you run out of cash.”
2. No knowledge of handling finances/recordkeeping. Otherwise sophisticated business owners never cease to amaze me because of the inadequacy of their business records and lack of understanding. If for no other reason you need to keep accurate records for the IRS. More importantly it is impossible to manage your business successfully without them.
3. Carrying inadequate inventory and payroll. Is too much inventory good news or bad news? Bad news!!! Why? The cost to carry can be in excess of 25%. Is too little inventory good news or bad news? Bad news!!! Why? Loss of sales. Is too many people good news or bad news? Bad news!!! Why? Excess capacity equals waste. Is too few people good news or bad news? Bad news!!! Why? Loss of business for lack of service. The appropriate level of both inventory and people is critical to your success.
4. Poor credit granting practices. This leads to an inability to convert trade receivables to cash and ultimately bad debt losses. While most of us are motivated to sell and measure success based on top line numbers if you can’t convert the trade receivable to cash the party is over. Business must make sound credit granting decisions, get the billings out, make the calls when customers violate credit terms and cut customers off as appropriate.
5. Emotional pricing. Most of you price for the customer who says “You’re too expensive!” That pricing policy fails on its face. Or perhaps you’ll be a little more “strategic” and attempt to buy market share (penetration pricing) through low prices. Recently a new client came to us because of cash flow problems. His pricing strategy was to buy market share. He couldn’t understand why with $1,000,000 in sales nine months he had cash flow problems. After all it seems with that kind of sales volume you should be making money, right? Wrong!!! The direct costs associated with those sales were $1,500,000. Ouch! The moral of the story is you must understand pricing.
6. Living too high for the business. There is an age old adage that represents the opposite side of this coin and that’s “Waste not want not.” Too many times operators forget that there are business cycles and the cycles cut both ways. You must prepare for the “bad times” during the good times.
7. Expansion too rapid. We here at Numerico believe in getting rich slowly. It takes time to build all business functions (administration, marketing and production) and all three must be intact to grow profitably. As you grow it is very easy to let the expenses in these areas get away from you but you can’t. With the average small business on putting just 3% on the bottom line there is no room, on the expense side, for error. Again “Waste not want not”. Active management of operating expenses is essential.
8. Wasted advertising budget. Promoting your business, however your industry does so, is a science, art and requires money. Given the limited resources we all have our marketing plan cannot be weak, or worse, non-existent. You have got to have a plan and it has got to be in writing.
9. Inadequate borrowing practices. Trick question. Do you go to the bank when you need the money or when you don’t need the money??? Of course the answer is when you don’t need the money. Let’s face it, the bank in not a venture capitalist and as such not in the business of lending you anything when you need it. The ability to anticipate cash needs, WELL AHEAD of the actual demand, is proactive planning (See #1 above).
10. Non-payment of taxes. Let me just remind you that the IRS has no sense of humor what so ever! This is clearly a pitfall to be avoided and as such we have two rules here. Rule #1 – Pay the taxes! And Rule #2 – Refer to rule #1!
Pitfall avoidance is good for the health of your business. Fall prey to many of these and it will mean the demise of your business.
Certainly we have all made our share of these mistakes and in varying degrees. Should you find yourself in need of ways to help restore your business to heathy growth because of this feel free to contact for consultation. The initial consultation is on us.
This is a guest post from Numerico, PC.
