6 Money Mistakes New Business Owners Make

January 16, 2008

If you’re just starting out in business - don’t make one of these six money mistakes that some new business owners make.

Thinking New Means Cheap: Starting out with far lower pricing than your competitors, just because you’re new, is a fatal mistake that many new business owners make. You do need to have a competitive advantage, but it should never be the lowest price.

There are several reason for this including the following: It would be easier for a competitor to put you out of business, you will only attract the customers you don’t want and you won’t be able to afford to provide a high standard of service.

Treating Your Business Like A Mystery Novel: We all love being kept in suspense when we’re reading a mystery novel. And it’s great fun trying to work out “who done it” isn’t it? But, there should be no suspense, or sleuthing when it comes to the finances of your businesses. So do financial forecasts right from the beginning.

It may sound a little tedious, but without them, you have no way of knowing whether your business is going to be profitable. You could mess about with spreadsheets for ages, like I used to do, or you could save time by using some simple forecasting software..

Trying To Lassoo The Big Guns: Large contracts can bring in a lot of money eventually. But, they also take time to negotiate and longer payment periods can have a huge impact on your cashflow. Concentrate your time and efforts on getting business that will bring cash in immediately to begin with. You can go after the larger contracts later on.

Not Introducing Yourself to Your New Best Friend - The Taxman: - Many people start their own business as a hobby and don’t bother telling the taxman they exist until later on. However, if you need to purchase quite a bit of stock and equipment when you’re just starting out, you could miss out on the benefits of putting it against tax.

Also if you are from the UK, consider registering for VAT. Calculating your VAT returns can be a pain, but it can be worthwhile as you can claim all the VAT back on the items that attract VAT when you start up.

Buying Stuff For The Sake Of Stuff: When you’re just starting out question every single item you purchase. Will it help you make more sales? If not, the chances are you don’t need it.

Assuming Your Business Is A Cash Dispenser: Unless you are extremely lucky, the chances are - you’re not going to be able to afford to pay yourself for at least a few months. So make sure you have at least one years living expenses set aside and keep them low.

And remember, just before starting a new business is not the best time to go out and buy a brand new BMW, no matter what other people tell you. Why put that much pressure on your finances?

Have you made money mistakes in your business? Or is worrying about money holding you back from starting out on your own to begin with?

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Comments

14 Responses to “6 Money Mistakes New Business Owners Make”

jsanderz on January 16th, 2008 2:25 pm

Cath,
I have had a few businesses in my time, some succesful and some not, and your list is spot on.
Do your home work before you start any business.
I like the ’simple forcasting software’ may give it a try.
Great blog by the way.
Regards.

jsanderz’s last blog post..Backup or Else..Continued
Ian Denny on January 16th, 2008 2:56 pm

Another 6 big ticks.

Unless you’ve had a failure and started again, it’s very easy to ignore the lessons of the experienced.

That entrepreneurial dream has many of the pitfalls carefully edited out by the initial enthusiasm.

The trap the majority fall into is absolute belief in what they do. Often, people are spending their wealth and living like they’ve already succeeded before they’ve even started.

Fortunately, the very wise who trust your list and act upon the advice can avoid these pitfalls.

Heed the sage!

Ian Denny’s last blog post..Broadband Is Down! How Small Businesses Can Cope: Part III, 3G Internet Access
cathlawson on January 16th, 2008 3:25 pm

Thank you Jsanderz. The forecasting software is great. I’m not brilliant with spreadsheets, so it’s far quicker. Plus, it takes seconds to work out things like - what would happen if half your customers paid you a month late, which is useful.

Very well put Ian. And I can understand how some people would think that they were being negative to even consider any potential problems.

But, when you’re making any business decision I think you have to consider the worst possible thing that could go wrong and have a plan for dealing with it.

And thank you very much for the kind comments.
Barbara on January 16th, 2008 8:07 pm

Catherine,

You are right on with these tips.

What we have seen a lot of, are new business owners who feel they need brand new equipment and a new pickup truck with their name on the side. They have started a business thinking they will get rich, have one or two jobs lined out, and then when the bottom falls out, or they mess up on their first job, and their reputation starts to suffer…they are stuck. The payments keep coming, but there’s no income.

The new equipment goes back, as does the truck, and they walk around with “egg on their face”.

We know from experience, customers don’t care if your equipment is brand new, or what type of vehicle you drive. They want the job done, done right, and on time.

Too often new business owners forget about the overhead that’s involved in a business…taxes, insurance, permits, licenses, bonds, payroll, fuel, repairs and maintenance, …just to name a few.

Although business ownership can be a joy, much thought and planning needs to be put into it, prior to “opening your doors” for business.

You’re correct on “not expecting a paycheck” for yourself, for awhile. The bills must be paid first, even if that means eating potato soup five times a week.

Self employment can put a strain on a marriage as well, Your spouse needs to be on the “same page”, and know what the household budget is. I’ve seen quite a few marriages break up over self employment. Often, it’s the wife, who cannot handle the financial restrictions, not to mention the time it takes away from the family when you are new in business.

It’s not always easy, but when it works, the rewards often outweigh the sacrifices.

Barbara’s last blog post..Google Kicked Me Out Of The Sandbox
cathlawson on January 16th, 2008 8:33 pm

Hi Barbara - That is so true. Many new business owners don’t have a realistic idea of what their overheads actually are when they begin trading.

Fuel alone is terrible right now. I know you’ve mentioned that you’re suffering from the price hikes in the US, but fuel prices over here are so horrendous that I’m considering getting rid of the vans and using mopeds instead.

More often than not , the ones who run into difficulties tend to be the tradespeople who decide to go it alone because they think they can do a better job than the company they work for.

And it’s a shame, but they enter business with blinkers on and focus on the technical side of the business without considering for one minute that there’s a lot more too it.
Ian Denny on January 16th, 2008 9:14 pm

The negative aspect can be taken a little further. When you’re focused on starting a business, your energy and focus is “positive”.

I wrote about that recently where you tend to notice more of what’s on your mind and tune out the other stuff.

So I suspect that because a new enterprise is full of hope, aspiration, enthusiasm, excitement etc it’s polar opposite, negativity, is not even in your peripheral vision.

So when you read this list when starting out, the negative aspects do not explode into your consciousness like they should to really assist.

Food for thought!

Ian Denny’s last blog post..Stumbled Upon Insight: The Life-Raft Of Business Turnaround Or Short Cut To A Better Ship?
cathlawson on January 16th, 2008 10:03 pm

See what you mean Ian. So anyone who could really benefit from this post might see it, and not even consider it relevant to them.

Oh well - hopefully it will benefit some people. Mmm - I’m wondering if I should not have put - “new” business owners in the title.
Mrs. Micah on January 16th, 2008 11:39 pm

I think it’s probably especially hard to judge whether or not things will help your business. Or to think of judging that. I mean, we all love office supplies, right? I bet starting one’s own business would be a really good excuse for it, and they might seem “necessary.”
The Internet Entrepreneur Diary - Terence Chang on January 16th, 2008 11:45 pm

Cath:

Great post. I am glad that you are doing great with your plumbing business.

It’s not the dot come era any more. I think the new business owners are more conservatives these days.

The Internet Entrepreneur Diary - Terence Chang’s last blog post..Add trusted image to your online business with toll free phone number
cathlawson on January 17th, 2008 5:47 am

Hi Mrs M - I’ve never really understood this great fascination with office supplies, but it seems really common.

In fact, I had to stop letting people order stuff without permission, because they’d buy way to much, and get things that seemed totally unnecessary like large quantities of liquid paper and multi coloured post it notes.

Why are people so addicted to them do you think?

Hi Terence - thank you. That is an excellent observation. And I wonder why that is? Are people educating themselves more before they start a new business? Or, is it because fewer new Internet businesses are having heaps of VC money thrown at them?
xBrain on January 17th, 2008 10:13 am

Thinking New Means Cheap -> I do agree with you on this. Just imagine if we put the lowest price then we will kill the market in the future
cathlawson on January 17th, 2008 11:34 am

Exactly xBrain but so many new business do try it, half the time because they have nothing different to offer. They see other businesses that seem to be doing ok - jump on the me too bandwagon and use lower pricing to try to compete. It’s total madness.
Norhafidz on July 11th, 2008 2:57 pm

I did the #first mistake when I first started an online business 2 years ago, and guess what? No one buy my products
Norhafidz’s last blog post..Apology For ?Missing Comments?
cathlawson on July 12th, 2008 10:55 am

Hi Norhafidz - That was bad luck - but many people have done it. The good thing is that we can recognise these mistakes and learn from them.