Common mistakes while starting your business

If you make the right decisions when starting your business, you can set up yourself for life. However, making mistakes in starting your business, especially the eight mistakes I discuss in this article, will crush you, make you do a ton of work for nothing, and weaken your ability to succeed. Even if you succeed, it will only be fleeting. Even worse, you’ll waste valuable time and money, potentially going broke from your failures.

So what are these mistakes?

Not forming a business plan

Every business needs a plan. Even a rudimentary plan is good for just beginning, but you want something more permanent. You need to develop a plan so that you develop a mission, vision, and a why for everything that goes on in your business. The business plan is critical not only for your own internal motivation (as having a guiding star makes you focused on your plan), but also for access to capital markets.

In order to gain a bank loan for your business, you need an airtight business plan that shows the bank that this loan is worthy of pursuing. In order to get angel investors and venture capital, you need a good plan that allows them to realistically not only recoup, but double, triple, or multiply their wealth by a huge factor.

Forming a business plan makes good business sense, and can only help you. The dangers of not developing a business plan is that you may be unfocused, or you may not figure out the unique challenges of your specific market, making you blind to the competitive landscape and more likely to choose a bad business.

Choosing a low margin business

A low margin business means several things. 

1. The business is competitive. 

An example of a type of business that is low margin, and thus requires a high amount of transactions (work) to be profitable is the agricultural space. Food is plentiful, and is low cost in industrial society, making it less likely to be a good industry if your business is not differentiated in a way. Branding is critical for this. If a farm is known for organic, high quality farming, it would make much more money than a run of the mill farm.

2. There are high costs associated per dollar of profit. 

A wise man would rather have a business earning $150k gross with a 90% margin than earn 1mm gross with a 1% margin, all else being equal. Low margin businesses tend to be difficult to succeed in, because if you make a mistake with your costs, there is little room to save your profitability. High margin businesses are more forgiving than low margin businesses when it comes to costing decisions.

Low margin businesses take a lot of work to make a decent amount of money. They are painful and take a lot of work to get them to a decent size. I highly recommend you do not pursue a business with low margins, especially if you want to make decent money. You will work like a dog in a low margin business, for little reward.

Low margin businesses are also a sign of another problem, low barriers to entry, the next mistake on the list.

Going into a business that has low barriers to entry

A business that is easy to enter and exit means that it is likely to be hyper competitive. An example of this is the digital marketing industry. Digital marketers are extremely common. Digital marketers are hungry for business, and the clients aren’t chasing them - they are chasing clients. There isn’t a moat to the business with the exception of developing happy customer relationships, one that you don’t have when starting, unless you underprice your services compared to the market (the next mistake on the list - DON’T DO THIS).

A business where just anybody on the street will likely revert towards subsistence level. Choose industries with higher barriers to entry - regulation, capital requirements, certification, and licensing requirements, or even something where you have a trade secret or intellectual property that gives you an edge over the competition. If you are on a level playing field, you are doing something wrong.

You need some sort of edge in your business, something that differentiates you from the competition. Low barriers to entry are antithetical to that. You are always fending off competitors, making you forced to lower your prices to a level that makes you poorer, makes you have to work harder, and makes it difficult for you to scale and succeed. Don’t enter a business that is easy for anyone to do.

Underpricing your services

But…I want to get more clients, you may say. That is foolishness. If you compete on price, you will always lose, because there will always be a business that sells products and services cheaper than you. If you are focused on lowering prices, and not charging price for value, you are making a critical mistake. You will be working hard for little money, slaving away, even worse than if you were even in the worst 9 to 5 job. This is suboptimal for your success.

Rightly pricing your services can be extremely useful to your business. Do you have too much work? Charge more for your services and hike prices on your clients. Your work will be reduced, and you’ll be paid more per engagement. You need to be a shark about prices and be firm in your negotiations. If you are super agreeable, you will not be successful in business.

Value yourself. Value your products and services. If you have a confidence issue, you need to learn to accept yourself and know that your work is important. If you don’t believe in yourself, why are you doing what you are doing? Contact us if you have problems navigating raising prices.

Starting a business you know nothing about

If you know nothing about the price of materials, labor, and supplies, you should not be in the construction business. If you know nothing about finance, you should not become a financial advisor. Some people have no business starting the type of business they start. Don’t become a farmer if you don’t have knowledge about farming! You will make so many mistakes you will not know where you went wrong.

Do what you are good at. If you are a doctor, it doesn’t make sense to completely change fields to start a business. Start a medical practice, or at least start something related to the medical sciences. Your domain level expertise is critical for the type of business you want to start. Entrepreneurship is not an excursion, it is a lifestyle. You must live and breathe your business.

There is a reason why certain trades were passed down from father to son. This is because talent from childhood can be nurtured to make a domain level expertise, and allow for businesses to be extremely effective in their narrow domain. Contact us and schedule a consultation to find out what types of business you should start.

Not paying attention to the tax implications of your business

If you think you want to start a hedge fund and you don’t know about capital gains taxes, you probably don’t know that you don’t want to start a hedge fund. Taxes are a critical aspect of your business, and understanding the implications of your business taxes are critical. 

There are many types of taxes: including sales tax, excise taxes, income taxes, value-added tax, tariffs, licensing taxes and more. Whatever business you are in, you have to have knowledge on the different taxes you have to deal with, and their implications on your business.

For example, tariffs have negative implications for the dropshipping industry. The business where you buy cheap goods from a country after you sell them on your webpage internationally and figure out a way to distribute goods quickly, is not a good business anymore, as long as the government of the country to which you are selling creates high taxes on the goods that is sold from the country you are buying from.

Knowing the tax implications of business are critical for developing a strategy, and taxes are constantly changing. Schedule a consultation with me to see many implications of taxes on your business.

Failing to monitor your finances

The first step of starting a business is separating your business finances from personal finances and developing a system for tracking and monitoring the finances on your personal side and your business side. Mixing the two is a recipe for disaster, both tax wise, liability wise, and strategy wise.

On the business side, if you want to gain access to capital, either from a bank or from investors, you need nice clean accounting books for your business. You need to develop a budget and plan your finances. We can help with this - contact us. 

No matter what, if you don’t develop and maintain a financial plan for your business, you will not even know the potential weaknesses of your business. You will not know how to tweak your business to help it improve. You will make mistakes that are difficult to recover from. Make a plan.

Giving up equity control too quickly

Taking venture capital money or private equity money is tempting, but it is better to keep control of your business and grow less quickly, then build a billion-dollar business and have no control over it. Giving up equity is a Faustian bargain. You have short term gain, for an uncertain outcome for your business.

Once you give up equity stakes, you lose strategic control over your business. Even giving up a small amount - let's say 20%, gives those shareholders rights. And if you do something they don’t like, they can sue you.

You have to balance control and growth in your business. More capital is good, but if you develop a capital generating machine, there is no need for outside capital. Venture capital is helpful, but you need to understand the risk that you may no longer be able to control your company.

Do you have any questions about any of this? Contact us! We can help you develop a business that succeeds in getting clients, grow faster, and help you get funding. We hope you become a client of ours.

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