Continuing our series on mistakes made in business, this time we focus mainly on the mistakes of the first-time entrepreneur. Knowing them in advance can keep many people from rushing straight into the same holes others have already fallen into.
To do this we draw on the wisdom of business people such as Peter Baskerville, who has started more than 13 companies, so some of these mistakes are scars he still carries. We also include some of the mistakes made by Michal Ugor, partner and founder of 500 Startups.
1. Not giving cash flow the importance it deserves. If, on top of that, we mix our personal finances with the business’s, we will have lost control of the business accounts. Baskerville reminds us that cash flow is more important than your mother, because it is what measures the company’s liquidity and profitability. Don’t forget that a business can have cash problems and still be very profitable, and the reverse is also true (though only for a limited time).
2. Not realising that the world is not going to starve while it waits for you to open your business. What he means is that many entrepreneurs think that just because they open a new business, people will queue at the door. You have to build a customer base, and customers have to be sought out, using every marketing strategy within your reach: discounts, free samples, promotions and so on.
3. Not knowing your business’s break-even point. You may have a brilliant business idea. Some take longer to take off, others less, but it is very likely that your business will take anywhere from 18 months to 3 years to reach break-even, so you need to be prepared to have the necessary capital reserves until the business can fund itself. That is why we always remind readers that an entrepreneur should expect the business to have higher costs than planned and lower income than calculated, probably for a long period of time.
4. Not understanding real margins. It seems simple. We buy at €1 and sell at €2, making 100% on the sale of the product. It is rather more complex than that, because you will probably need a much larger margin to cover all the costs associated with the product and with selling it. To be profitable you may need to buy at €1 and sell at €10. Would people buy the product at €10?
Example: Suppose that in a café a kilo of coffee costs €10, and it makes 120 coffees that we sell at €1 each. That is a return of practically 1,000%. Now add the wages of the waiter who serves the coffee, water, electricity, dishwasher detergent, sugar and taxes, and the return is nothing like that.
5. Building before selling. Many entrepreneurs have a business idea and immediately start investing in building the business, the premises and even mass production of their product. You have to sell first, even if only a representative sample, and you should have customers even before you open the business, not after. Two articles can help you understand this point perfectly:
- Validate your business idea in five minutes with a napkin and a pen
- If you are going to fail, do it this way
6. The wrong partners. As we said some time ago, the ideal number of people to start a business with is an odd number smaller than 3, but… you may need to bring in partners, and in many cases we choose a purely financial partner whose money will come in handy today, but tomorrow… On other occasions, our partner can become a problem. (Read: 10 tips for choosing a partner for your business)
7. Keeping the idea secret. This is probably one of the most foolish mistakes a first-time entrepreneur can make. It is common not to share our business ideas for fear that someone will steal them and get rich thanks to our idea. Copycats don’t copy ideas; they copy models that work. Could someone decide to copy your idea? Of course, but talking about your idea can lead many people to offer to help you, support you and even iron out possible flaws you hadn’t thought of. There must be thousands of people in the world who have spent years jealously guarding potential ideas they have still not dared to bring to market.
8. Not seeking or using customer feedback. The product should come out soon, but not in a rush, and it will probably need improvements. We should make those improvements based on the advice of customers who have already bought from us, or of potential customers who currently buy from the competition. The customer will be our best adviser, since the future of our business depends on them.
9. Underestimating the difficulty even when you know it will be hard. Starting a business is no bed of roses, but most people underestimate the enormous difficulties they will face in creating the business and keeping it going until it stabilises. There is little to add to what we already said in the secret price of starting your own business.
10. Not knowing the difference between working smart and working hard.
There is a huge difference between working hard and working smart, although in business you will probably have to work hard and smart at the same time. The truth is that you need to learn to get organised and have a well-developed strategy. Only then will you know where you are heading. The person who works 14 hours is not always more efficient than the one who works 8, but we can say for sure that someone who works 14 hours smartly is far more efficient than someone who works 10 hours (smartly or not).
11. Making decisions lightly. Many entrepreneurs have drilled into their heads the idea that you have to take risks and lose your fear of taking them, which does not mean you should make decisions recklessly just because you have accepted the risk. Drill this into your head:
“Every decision that involves risk must be carefully studied and analysed to leave as little as possible to chance. Being afraid of risk may be cowardly, but making decisions without weighing the risks is simply idiotic, not brave.”
Further reading
- This is the main mistake I keep finding in small businesses
- How to find the perfect product to sell in your business
- If you sell products online, a simple trick for taking professional photos without spending money
Featured image: Nenad Stojković, CC BY 2.0, via Wikimedia Commons.
