These are the top 10 common mistakes business owners make:
Failing to run the business “around” the numbers
Failing to plan
Offering customer accounts, poor payment terms & poor collections
Poor payroll calendars & paydays
Overdrawing
Failing to reserve money for obligations
Failing to strategise and systemise & create strong SOP’s (standard operating procedures)
Wasting money on advertising that doesn’t work
Starting but not finishing
Poor habits & mindset
Around 40% of all small businesses go bust in their first year and 80% within 5 years and that trend is pretty global.
Why? Well, they’re thinking the wrong way from the get-go (misconceptions) and they’re making mistakes. When we make mistakes in business it’s known as “paying dumb tax”. Mistakes cost money.
When your business is small you’ll pay small amounts of dumb tax (but it’ll still hurt). The more you grow, the bigger the dumb tax bill gets relevant to the mistakes you make.
I’ve worked with plenty of business owners turning over millions of dollars who are making NO profit. Why? Because the cost of a mistake (the dumb tax) IS relevant to the business size. The bigger the business, the bigger the dumb tax bill.
Take Sam the bricklayer for example. When he starts out in business as a small operator, hustling and laying bricks, if he quotes a job wrong it costs him $1500 in dumb tax. He gets slack with “customer payment collections”, there’s another “$5000” in dumb tax. But then he grows, starts doing bigger commercial jobs. He quotes a big job wrong and boom! He pays $50,000 in dumb tax.
We’ve all been there, myself included. Please use this “guidebook” as a way to save on dumb tax and remember...
“It's a mistake the first time, it's a choice the second”
Now let’s dive into the common mistakes and misconceptions that cause all this trouble (and dumb tax) in the first place.
Misconceptions are “errors in thinking”. Thinking the wrong way will prevent you from building your dream business. You need to let go of misconceptions & get informed and educated on what it takes to build a successful business.
“You don’t know what you don’t know”
Take multitasking for example. Some people know that multitasking is the death of productivity. That human brains are designed for single-tasking. This is a scientific fact. Google it & you’ll find volumes of information on the subject. But many people still have the misconception that multitasking makes you more productive.
“They believe the complete opposite of what is true”
Just because you’ve believed something for a long time doesn’t make it true. Just because there’s logic in it doesn’t make it true either.
Humans are stubborn, egotistical, and resistant to change. All of us are, to some extent.
Are you ready to let go of what you thought you knew? Leave the past behind, get savvy and start making great decisions?
Here is the first misconception I want to share with you.
MYTH great technician = business success
FACT the skills & work required to run a successful business are very
different to being great at what you do (the technical stuff)
The E-Myth explains this misconception in more detail and quite eloquently.
“This myth and fact is well known by entrepreneurs who’ve made it past the 5 year mark”
They’ve gone on to be one of the 20% of businesses that succeed. They too once held this misconception before learning the “right way to think”. And, they paid lots of dumb taxes along the way.
There are 3 main stages that every small business goes through. The E-Myth calls them Infancy, Adolescence, and Maturity (which I’ll expand on later).
Here’s how this misconception plays out in the first two stages.
Mick is an electrician. He’s been in the game now, working for other people for 20 years. Mick is really a cut above when it comes to his skills and even his common sense. He’s often called upon (by his bosses) to do the stuff no one can sort out. Mick is faster and more efficient than everyone else meaning his jobs are more profitable. Plus, he gets the job done right, the first time and the customers are raving fans. One day Mick starts to wonder…
“maybe I should do this for myself? I mean I’m yet to meet a sparky as talented as me. And if I work for myself then I’ll make all the money for myself rather than making my bosses rich. Customers love me so I’m sure to be busy. In Fact, I reckon a few customers will even follow me”. You know what, I’m going to do this!”
Mick checks in with family and friends who agree with his logic and encourage him to pursue his dream.
As you can see, Mick thinks that being a great technician means he’ll be able to run a successful business.
Mick starts his business and drums up some work. He’s earning 3-4 times his old hourly rate, he’s feeling great. His bank account is going up, his customers are happy, he’s getting referrals and the business is growing.
Mick's business is in the infancy stage.
Then one day Mick says to himself...
“I’m getting more work than I can handle, I better phone a friend to come help me.”
Mick checks with his top-notch advisers again (family and friends) and gets the green light.
Now, if you noticed a hint of sarcasm in that last sentence, you’re onto something!
“Do you know why advice is free? Because it’s worthless.”
Mick's well meaning family and friends know less about “operating a business” than Mick does. All he is getting is “confirmation bias”.
“Confirmation bias is the tendency to interpret new evidence as confirmation of one's existing beliefs or theories”
Definitions from Oxford Languages
Before I finish telling you the rest of Mick's story it’s time to introduce you to misconception number 2 and that is…
MYTH If I make more sales, I’ll make more profit
FACT If I make more sales, I’ll make more sales
If you’re doing a bit of a double-take right now, just read it again. The devil is in the detail.
So Mick employs his mate, Bob.
Mick’s business is now entering the adolescence phase.
Bob jumps in and takes some of the load so Mick can make more sales and grow which is exactly what he does. After all, more sales = more profit right? Wrong!
This my friends is when “adolescence growing pains” start.
“Growing pains in business are the aches and pains that set in once you start employing people. The business starts to get a little ill, the vital signs being the profit, cash & customer satisfaction start to deteriorate”
Bob is employed on a casual basis & agrees to use his own vehicle and tools. They don’t get too caught up in the details, after all they’re mates right? At first, things go well but after a few weeks, the aches and pains start...
Bob leaves a few jobs forgetting to collect payment
Bob causes some damage at a customer’s home
A few customers complain and you have to do rectification work
You raise “issues” with Bob and he takes offense, gets upset and says “listen mate, I’m helping you out here and anyway, you’re the one making all the money off my hard work”
Bob asks you to reimburse him for the use of his vehicle, tools and other items which is twice as much as what you’d anticipated
Bob takes longer than you on fixed price jobs resulting in almost no profit margin
Mick finally tries and collect money on the jobs Bob left without payment with no result
Mick is now forced to “train and manage” Bob and attend to all the “fires” which is time that generates no income, no new leads and no new customers
All of these things amount to lost time, money & your damaged reputation.
The cash in the bank is dwindling. Mick hasn’t kept his Bookkeeping up to date and so without realising it, Mick is now running up debt to the ATO. To make matters worse, Mick is only looking at the bank account to measure his business’s performance (profit and cash) and so he’s unaware he’s making next to no profit.
Not only are the vital signs poor, but the business is also much sicker than Mick even knows.
The problems I have illustrated in this story are “the tip of the iceberg” and what’s more, they can easily turn into a cycle that goes on for years all because the business owner is thinking and acting the wrong way.
So now that you know the first 2 big misconceptions that can turn your “business dream into a business nightmare” and a little bit about how they “play out”, let’s look at some common mistakes that you might be making.
The mistakes I’m going to illustrate are also part of Mick’s story.
I’m going to keep these short and sweet because I’ll expand on them in subsequent chapters. For now, I just want to make you aware of these common mistakes. Awareness is the first step to change.
The first 2 are
Falling Behind on your Bookkeeping
Running your business on the bank account
These 2 mistakes go hand in hand because if you are behind on your Bookkeeping then you really only have the bank balance to rely on. But...
“your bank account does not tell you how your business is performing”
Your “financials” tell you how your business is performing and you need up-to-date, accurate Bookkeeping to access them.
Oh my goodness can I tell you how important that is to grasp!
I remember some years ago, my Bookkeeper said to me “you have a lot of money in your bank account” to which I replied, “yes, and none of it is mine”. My bank account contained money for the ATO, the staff superannuation, software suppliers, and payroll. And not by accident, deliberately. I’d set myself (and numbers strategy) up that way. Which is what I’ll show you too.
Yes, I’m a Bookkeeper who has a Bookkeeper. And unless you have a burning desire to do Bookkeeping I don’t recommend you do yours either. Here’s what my clients constantly tell me...
“When I started out in business I thought I couldn’t afford to seek business advice or get a Bookkeeper but now I know I can’t afford not to.”
As I said, in subsequent chapters, I’ll go into more detail about common mistakes. For now, here’s a list of the “top 10 main offenders” that might be holding you back (and causing dumb tax bills).
Failing to run the business “around” the numbers
Failing to plan
Offering customer accounts, poor payment terms & poor collections
Poor payroll calendars & paydays
Overdrawing
Failing to reserve money for obligations
Failing to strategise and systemise & create strong SOP’s (standard operating procedures)
Wasting money on advertising that doesn’t work
Starting but not finishing
Poor habits & mindset
All of these mistakes cause cash flow pressure and profit leakage and slowly turn your business dream into a nightmare.
Profit Leakage is a term I’d like you to become familiar with. There are many examples of profit leakage in Mick’s story. For example “time spent on customer collections”. That’s an admin “cost” you could have avoided with better systems.
A word on cash flow...
“Sales is vanity, profit is sanity but cash is king.”
Running out of cash (for any reason) will send a business broke even if they’re making a profit.
If you’re like most business owners you’ll find that sentence a bit confusing. You may not yet understand the difference between “a profit and a cash flow problem”. And you’re in good company.
Years ago a Tax Accountant asked me to coach him to help him improve his cash flow. After we had our first discovery session I explained to him “you don’t have a cash flow problem, you have a not-enough-sales problem”.
My point is that even Accountants sometimes fail to see the difference between a profit and a cash flow problem.
Rather than have you become an expert in Accounting terminology I’m going to take you on a Numbers Knowledge journey and set you up with best practices so that ultimately things take care of themselves.
There are 3 A’s to change
Awareness
Acceptance
Action
I’ve made you aware of misconceptions and mistakes that can lead your business dream to become a nightmare. Now it’s over to you to accept these things and to take action.
If you are behind on your bookkeeping, your number one job right now is to get up to date. This is the foundation from which we’ll build your business success.
And by the way, check out these cool freebies to help you optimise your business performance.
Online Mastermind
https://www.cloud9strategic.com.au/mastermind-online-event
Diagnostic Scorecard
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Free Discovery Call
https://calendly.com/cloud9strategic/free-discovery-call-social-media