In this blog, I will share the five mistakes small business owners make you should make sure you don’t fall victim to.
It is estimated approximately 20% of new businesses fail in their first year. By their third birthday, 60% of them fall by the wayside.
The bad news: being in business (statistically) is not in your favour. The good news: with preparation and investing in your own skill development as a business owner, you can learn from your mistakes.
I have turned numerous businesses around throughout my career as a business coach and transformed plateauing businesses into growing, scaling and thriving ones. They transformed into profit-making machines, went on to hire tens of employees and became valuable assets to their owners.
Using discounting as a default means of winning business
A new business owner needs sales, quick.
To bring money into the company – usually due to inexperience – they use discounting to incentivise sales. While it is true everybody likes a deal, discounting kills profitability while also lowering the value of what you sell.
When you look at how discounting affects gross profit on a product, you will realise it is a much heftier chunk you are giving away than the communicated % suggests it is.
For example, if you are selling an item with a 30% gross profit – with a discount of 10% – you would need to sell 50% more volume (not 10%) before you start to make more profit overall.
When starting a new business, you have enough overheads and costs without adding on losing your margin when providing the services and products you are selling. Or if you are looking to give your sales a quick boost, you don’t want to be damaging your margin and profit at the same time!
Instead, focus your time and energy on creating an attractive value proposition.
Not forecasting cashflow
As the saying goes, revenue is vanity, profit is sanity – cash is reality.
There are many examples of companies that were successful and hit record-high revenue, but upon closer inspection, would show large debts. The downfall of Enron is a fitting example of this. Measuring your companies purely on revenue is naive…
…and believe it or not, so is profit.
Due to accrual accounting, profit in the UK can be recorded before the money hits your account.
Let us say you make a sale of £1,000 in March with 30-day payment terms. This means the money would hit your account in April – yet HMRC would still view this as a sale made in the previous month.
On paper, you can be making a healthy profit, but if it takes a long time for the money to hit your account, things can get ugly, quickly. This is why forecasting your cash flow is so important.
Most accounting software offers some form of forecasting, but all base it upon invoices that have been previously “raised”. This does not include secured future work which has not yet had related invoices raised.
For a longer forecast, there are some more refined systems, but a spreadsheet is still the easiest and best value for many SMEs. Read more cashflow tips of ours, here.
Not pre-saving for taxes owed
Whenever revenue exceeds £85,000 a company is liable to pay VAT. In the UK, VAT is paid quarterly, meaning you could have three months of VAT in your account that is not yours.
Echoing my point above, this creates a false sense of confidence that you have more money than you need.
Other taxes, including corporation tax, income tax and CIS all need to be set aside and viewed not as your money, but as the governments. Failing to manage it properly can lead to fines and closure. Forecasting helps you see how much to put aside.
Remember that corporation tax is due 9 months and 1 day after your end of the year, meaning ideally you still have that value set aside after paying the current due amount.
This is important if you do not fancy paying a big, unexpected figure on a business exit or sale.
Reliance on inbound leads
When a business does a good job, they usually get referrals, and before they know it – they have more work than it can handle.
Despite this, just relying on referrals isn’t smart. For one, they’re out of your control and are limited to a confined pool of people, usually, based within your locale.
Viewing promotional marketing and sales tactics as “unnecessary if your product/service is good” is naive.
The truth is that you can have the best offering in the world but if no one knows about it or is educated on its benefits, they are not going to just ask to buy it. New businesses have a much higher requirement for direct outreach and more promotional marketing than more established businesses where the word is already out.
Even established businesses have competition and customers are fickle. Proactive direct marketing is not a “dirty task” but a growing business necessity.
Plan it in and get it done!
Failing to learn how to run a business – it is different to doing a job
Most new business owners are from previously employed roles; they have zero experience running a business.
Learning the new skills, roles, and responsibilities a business owner needs can be extremely challenging; the skills and responsibilities of running a business are broader than those required as an employee.
You may have been great at your last job, but what you learned as an employee means you missed out on everything else that made that company function.
You need professional training in marketing, sales, and finance, not to mention recruitment and management. Learning only through trial and error will lead to more costly mistakes and delays. Read books, attend workshops, sign up for courses or hire a business coach as ways to plug the gap in your knowledge and skill set.
Whatever it is, be proactive in:
- Identifying where you lack expertise (your knowledge gaps).
- Take the most practical course of action to close those gaps.
Looking for further advice for your business?
We hope that you’ve found this blog on the five common mistakes small business owners make useful.
If you’d like to see how working with an SME business coach could help you avoid these types of mistakes and enable your business to thrive, check out our business coaching services.
