Running a business is such a complex exercise it has been described as a matter of dealing with complexity. When people start businesses a lot can go wrong and statistics suggest that the greater majority of new businesses do not stay open for long. There are some common mistakes made by new business owners that you would do well to avoid. We will identify these and how to tackle them.
Poor Assumptions
Assumptions in themself are not a bad thing. Entire credible disciplines such as economics and statistics are based on assumptions. However poor and incorrect assumptions are very bad. Fatal for the new business. The two areas that I see the most of this are operating costs and the market. Many people make assumptions about their operating costs that exclude a lot of details because they don’t know the details yet. When it comes to the market many people assume for example the market wants to adopt the newer technology. I’ll tell you for free people only want the newer thing if you can demonstrate that it will improve their lives. Rather than just running with assumptions, research and substantiate them.
Spending heavy upfront
So you want to start a business? Well, you need machinery, inventory, workspace, employees, a website, photoshoots for the products, a vehicle, storerooms and before you know it you have a list that easily runs into thousands of dollars. All this before you have made a single sale? Here’s the thing, those plans are correct and you will need all those things along the way but spending all that money up front could be a trap. You may overestimate the demand and spend too much on machinery assuming you will make it back. You might find your business takes time to gain traction and the money you desperately need to attract customers is tied up in inventory.
Using the wrong funding
Funding is essential to the business journey. You will have to invest in things like customer acquisition if you’re going to make it anywhere. Funding is not always abundant and many people end up borrowing to finance a new business. This is great if like Donald Trump you can get a small loan of US$1 million from your father but for the rest of us borrowing for a new business may not be such a good idea. Call back to the issue of assumptions and you’ll realise that borrowing for something that isn’t operating is risky business.
Not taking supply chain seriously
We should all have a decent understanding of supply chains and how they figure into business. Your new business is not likely to be a grocery chain so monitoring thousands of farmers and producers isn’t your thing. However, you still need to think widely about your supply chain. I’ve encountered many stories of people whose businesses started fine then they had a glitch with the supplier and were caught with their pants down. Do you have a relationship with the supplier? Do you have a plan B or plan C? How long would it take to mobilise these plans? You need to take your supply-side relationships just as seriously as demand-side relationships.
Not taking the demand chain seriously
The demand has to do with activities undertaken to establish demand for your products. Many people start businesses with the “build it and they will come” mentality based on the fact that customers are buying similar products from others. There are a few important questions I always ask people with these sorts of ideas. Why do they (customers) choose the current option they are using? What would make them switch? What are the switching costs? Why would they switch to you? All of these questions must be answered in great detail with supporting evidence.
Not watching cash flow
When people assess their business ideas they usually look at profitability, as you should. What they consider is the cash flow. If for example, you are extending credit to customers that’s going to impact your cash flow. If not managed properly this will lead to a funding gap that must be financed, out of your pocket or through borrowing. Understandably, most people are not adept at cash flow analysis and you should seek appropriate help to understand how these decisions impact your cash flow and the very survival of your business.
Perhaps you have already started your business and some of these things are dawning on you. The fact that you have become aware of their existence is a step in the right direction. You cause the search box to look up articles related to these issues on our website.
