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Small Business - Questions | Problems | Mistakes

Updated: Jun 25

The following points are designed to prompt you to consider your business or idea from a multitude of perspectives. Business ability is incremental; Knowledge and experience should improve your chances and decrease your risks through foresight.


Who are you taking advice from?


Everyone has advice. The issue is taking good advice... and realistic advice. We've all heard the "It's already been done". But who is saying this? What authority do they have? Are they successful in their own right? On what basis did you solicit their 'advice'?


Ordinary people give ordinary advice... leading to ordinary outcomes.


An accomplished entrepreneur is more likely to say "How are you going to be better than the competition?" "Why would customers choose what you are offering?". "What's your USP?" (Unique Selling Proposition).


Bankers, Lawyers and Accountants have their respective specialisations, but they are not going to act as a business consultant in a professional capacity.


Hence, seek advice from already successful business owners, and even better from those in the industry where you want to compete. If you can find a suitable mentor then this can be ideal, even if it's just a few oversight discussions. Seek out information on the internet, books and even videos on YouTube.


Good advice should help you make decisions that are cost/benefit enhancing and risk optimal, effectively they'll focus your efforts where it matters and not on secondary/peripheral issues.


Lack of accountability


Every failure is your failure. If employees do not perform then what is the reason that you have control over that leads to this situation? - Lack of training? Lack of standardised processes? Unrealistic expectations? etc...


Every issue in the business ultimately is a problem that the owner is accountable for. Avoidance is never a solution... even when the issue appears to have dissipated, the effects have simply manifested into something else detrimental to the business; staff turnover, customer retention issues etc...


A good idea isn't necessarily a great business


Any idea needs to be contrasted against the current environment.


Larger corporates undertake a situational audit - Political, Economic, Social, Technological, Legal, Environmental... and what is referred to as a SWOT analysis, of Strengths Weaknesses Opportunities and Threats.


At a smaller business idea level a similar attenuated approach needs to be undertaken.


Who are the competitors? If there's no competitors why not?

Who are your buyers? Why would they buy from you?

Is there sufficient margin and volume for a sustainable business?

How much will it cost to set up? (Set up / Capital costs).

How much working capital is required? (Stock, Debtors etc).

How much will it cost to run? (Run costs / Overheads).


Effectively the less reference businesses you have to assess your idea business there is, the more you need to be circumspect about potential pitfalls. There's a reason for everything. The old adage of 'Stick to what you know' has credence for a reason.


Ask the intended target customer about your intention and solicit their feedback. Your idea may simply be a bad idea for various reasons. If you personally would not be the intended customer then you need to be especially cognisant of this. A target customer is likely to advise you of competitor/substitute products and a host of other angles that you as a non targeted customer wouldn't think of.


Having a new and novel idea is great, but it will likely have a high risk / reward. Is it ideal put everything you have on the line first time up? Ideas need to be protected which can be very expensive, if you don't protect your idea then it will be rapidly copied and distributed in sales networks before you get a chance to get going. Most entrepreneurs fail and learn a few times before they hit it out of the park... every strike is a lesson learned.


Entrepreneur versus the idea – A great match?


Different ideas require different skill sets. Furthermore, business is competitive and great businesses require long periods of dedicated time/input.


Ideally the business idea should have its main input, a skill that is matched by the ability of the founder. The founder also being passionate and prepared to engage in the idea (and forgo other ideas), for years if need be.


In effect the founder/entrepreneur needs to be realistic with their skill set, and match it against the requirements of the idea/business. The value created is then in the actual implementation and fulfilment of the idea to its conclusion.


A further issue is referred to as a ‘shiny object’ syndrome, where people are great starters but poor implementers and finishers, before they have another new idea and move onto it.


Being aware of your skills, abilities, temperament and interests is important especially when you are signing yourself up for an extended period of time and loss of capital.


Lack of research


Depending on how much capital and time you are investing, it should determine how much research you should undertake to you reduce your chances of a poor investment. You really want to reduce ‘unforeseen’ issues.


If you undertake something aligned with your previous experience then operationally you will likely know the day-to-day operations. However, ownership of that same business or setting up as a competitor requires additional knowledge that you may not have been privileged to.


A new product/service/business requires awareness of competitors.


It requires a very good understanding of customer/buyer needs/requirements.


The channels of sales and procurement need to be assessed. A great idea/product with no route to sales will not succeed, retail stores for instance may be reticent to stock your item.


In terms of procurement/manufacture has that been properly assessed? And financially?

Awareness of likely margin, revenue streams and overheads to sustainably run/implement the idea/business. An unprofitable business can only be maintained for so long before a decision needs to be made around long term viability.


The potential applicable research is quite vast as there are so many types of business models, however enough research needs to be undertaken to ensure the biggest risk elements are covered/assessed to give your idea/business the best possible chance of success.


Lastly, competitor analysis/research needs to be an ongoing activity simply because markets change, competitors change, new products/services arise… change is never ending.


Thinking customers are like you


A general mistake of numerous founders of businesses is that they believe customers/buyers are exactly like them, and want the same products/services that were often previously unavailable or not being performed to their ideal standard.


I’m sure most of us have seen this, a boutique/speciality or out of place business that represents more the owners’ desires rather than the conceivable needs of the local population.


The expression used is ‘Know your customer’.


Just because a good or service isn’t available, doesn’t mean it’s a viable business to provide it. The onus at the outset is to impartially determine that the customer base for the business is there in sufficient scale to make the idea viable. Know your customer.


Build it and they will come


This is connected to ‘Know your customer’, your customer ‘Needs to know that you exist’.

Simply building the product/service offering is insufficient if no potential customers are aware of your offering. You may actually have an outstanding proposition, but receive little custom.


It’s a question of balance to ensure that sufficient emphasis is put into the sales side of the business as has been put into product/service development and set up. Without sufficient marketing to generate sales then the business may ultimately fail, or at least run sub optimally until such time as customer referrals build.


Not confronting the difficult tasks


Often a founder of a business has a key skill set that is the main requirement to operationally deliver in the business. The issue however can become that a wider skill set is required to effectively run the business. Something the owner may not have previously been subject to.


A classic example is the great sole trader that expands because of large demand and then goes bankrupt because they cannot manage that larger business even though they are highly able at operationally delivering the product/service.


An alternative perspective is a person who was technically proficient and decides to go alone and set up a business. This requires a whole raft of additional skills that they previously may not have been exposed to.


Staff management, Taxes, compliance, IT, HR, Accounting etc, all need to be dealt with. The business owner ultimately is responsible for managing all this… while at the same time likely wanting to focus on their key ability to generate revenue for the business.


Simply burying your head in the sand and not confronting all these background issues doesn’t resolve them, they just grow and erode the business. Taxes that are not dealt with become burdened with penalties and so forth.


Hiding behind your desk


This requirement has somewhat reduced over the last few years with increasing use of internet-based communication. However, this is related to ‘Not confronting the difficult tasks’ in as much the owner has a certain comfort zone, and is reticent to move outside it. An owner that comes from a desk-based role may not like meeting, greeting and engaging with people, whether that is front line staff or customers.


The ideal really is to become the ‘Jack of all trades’ and be the ‘Master in at least one’.

Extroverted sales type personalities may not sit at their desks enough and undertake process/routine, while more introverted types may sit there too much. Balance.


We’ve all seen somewhat mediocre business owners do outstandingly well by simply being the face of the business, and putting themselves out there. Maybe that’s not you, but it’s likely that you’ll need at least an element of it to become noticed.


Being greedy with equity

This is actually a double-edged sword. In the case of the US ‘Shark Tank’ and Britain’s ‘Dragons Den’ the panel reflect on the fact that a significant number of participants seeking capital often over value their businesses. This may be true…and sometime participants are there really to promote their business on national television rather than seek equity/expertise.


However, the converse is also true where business owners have released significant equity to capital providers resulting in continual payments to silent partners who don’t enhance the businesses growth, they are essentially free riders.


The optimal allocation of equity is likely to be somewhere between the two perspectives.

Capital by itself is just a financing activity, its return is a function of the risk it assumes. How much at risk is the provider of that capital? Can the return on that capital (assuming you are successful) be upper bounded so you don’t spend the next 20 years forgoing value to that initial provider? One technique would be a timeline for likely conditional repayment of the that initial capital extended for a lower long run equity stake.


Allocating equity for specialist skills / connections is a logical basis, in the case of the shows mentioned above, if the Sharks/Dragons can 100x the turnover of the business through their connections, then allowing a substantial stake in the business is a beneficial activity.


Not putting your own money in – Skin in the game


The general consensus is that the more vested you are in the outcome of the business, then the more focused you will become in its success.


The Shark tank and Dragon investors mentioned previously, like it when you’re effectively shackled to the business, because if the business goes down, so do you. They want your total focus and commitment.


If its your only ‘employment’ and you have significant amount of money on the line, then you will be far more focused than if its one of 10 ideas, and you have other forms of income.

The main issue though with being ‘all in’ is that it is very risky.


If there is a choice of risk in terms of capital and income dependence then the natural suggestion is to ‘hedge your bets’ where possible. Furthermore, if you are new to entrepreneurial activity then you will make mistakes, your businesses may fail a few times before you hit a home run. The notion of ‘living to fight another day’ is important. Initial failure in a business when having placed a large amount of capital in it, may preclude you from undertaking a new business for a long period of time (If ever).


Burning Capital – Burn rate

This is a multidimensional issue and not always that easy to assess during the initial setup phase of a business proposition.


Effectively, in order to gain new clients/customers, some new businesses seek to project capability by having all the presence of a successful established business. However, in turn this generates large overheads (E.g., Plush offices, expensive company vehicles) and capital outlays/equipment to match. It is somewhat synonymous with the ‘build it and they will come’ section discussed previously. Then we can have business owner(s) having come from a more corporate background, and its associated business culture I.e., Larger entities spend larger sums, they have all the equipment. Air travel is always business class. Then there is the newer less sophisticated business owner that rushes about buying all the equipment rather than frugally trying to hold back as much cash as possible.


These types of situations all lead to capital being spent in businesses that is front loaded relative to their current sales turnover. Every single spend item on capital or commitment to overheads needs to be cost/benefit assessed, why? Cashflow.


A business needs to have a positive cashflow in order to be sustainable. Lack of cash however determines whether you can maintain expenditures within the business. No funds, means no business.


Newly set up businesses can have negative cashflows as their expenditures exceed their income. Hence the metric often referred to is ‘Burn rate’ which is a function of how long the business can stay in business with the current cash outflows (Months/Weeks/Days) before it conceivably needs to close its doors unless additional capital is injected.


Logical scalability


What works at one size of business doesn’t necessarily scale to another. A founder of a business for instance may have a wide variety of skills and through commitment and necessity be able to cover off a large number of different tasks, these additional hours of input are NOT shown as an additional direct business expense but shown as a resultant profit to the business.


Hence, we effectively have what is termed step costs in business. As the business scales at various points, it is necessary to overcome a constraint and step to a new level of resource. Whether this is a factory unit size, a staffing commitment level or machinery/equipment. Sales expansion can also necessitate increased geographic coverage, with all its attendant costs, until it too becomes self-sustaining.


There are also issues with fully understanding the true costs of providing a specific good or service. I had an initial case of a business very early in my career that was cross subsidising its online business through retail, it had so many damaged units in transit that the more it scaled its online business the more it would lose.


Any small business that wishes to significantly expand needs to realistically map out the route to that growth expansion.


Not adequately identifying your costs

This is more applicable to a new business start-up. The first piece of advice I would give any new start up in an established industry is try to get hold of a profit and loss statement of a similar business currently for sale.


This will give insight into the cost structures of a comparative business that you can use as a template for your own, even then you will have to rework the numbers for their inherent logic, as example sometimes the owners are not paid as a salary and may not be renting/leasing the property they business operates out of. These are costs you need to factor in.


Consider also peer businesses that have reference prices for their goods/services. If you are intending to compete on price then you seriously need to focus on and know your cost structures, and why you can sustain lower margins on the items you sell.


As some very broad metrics consider the following:


If sales are considered as 100%, then this is distributed generally as 65% for direct costs, 25% for overheads and approximately 10% profit before tax.


Your direct costs are things like stock used to generate sales or direct labor used to generate sales. Basically, costs incurred to directly generate those sales. Overheads are effectively anything not directly related to the actual sales income, this includes office staff, premises and so forth. The 10% is effectively what you’re left over with.


Not adequately identifying your costs


This is more applicable to a new business start-up. The first piece of advice I would give any new start up in an established industry is try to get hold of a profit and loss statement of a similar business currently for sale. This will give insight into the cost structures of a comparative business that you can use as a template for your own, even then you will have to rework the numbers for their inherent logic, as an example, sometimes the owners are not paid as a salary and may not be renting/leasing the property they business operates out of.


Consider also peer businesses that have reference prices for their goods/services. If you are intending to compete on price, then you seriously need to focus on and know your cost structures, and why you can sustain lower margins on the items you sell.


As some very broad metrics consider the following:


If sales are considered as 100%, then this is distributed generally as 65% for direct costs, 25% for overheads and approximately 10% profit before tax.


Your direct costs are things like stock used to generate sales or direct labor used to generate sales. Basically, costs incurred to directly generate those sales. Overheads are effectively anything not directly related to the actual sales income, this includes office staff, premises and so forth. The 10% is effectively what you’re left over with.

Hence, on a materiality basis the following costs need to be given adequate consideration:


  • If income is generated through sales of stock, then adequate consideration needs to be given to stock spoilage and stock that simply doesn’t sell. Unless you are constantly on top of this, and being realistic about writing it off, then it can remain hidden in the background until such time as it needs to be confronted. (Like you run out of working capital, but have a warehouse full of worthless damaged stock that costs more to sell than its actually worth). Another issue that specifically relates to imported stock, is the amount you are short sold (They don’t send the exact number of units paid for), where you are sold a high percentage of seconds within the shipment, or the items you are sent are not the same as the stock photo they have copied.

  • Where you are reliant on skilled/technical staff. Staff turnover can cost a lot when you consider recruitment agency costs, retraining. There are additional costs on top of basic salaries and holidays and other downtime (There are numerous government legislated rights that the business needs to cover) is unproductive time. It can cost a lot to build a competent and stable team, and you need to keep them productive fee generating work.

  • Debtors not paying or going out of business. Somewhat self-explanatory, you haven’t made the sale until you’ve collected the cash. Debtors can have a significant impact on cash balances within the business (Referred to as part of working capital) and need to be kept on top of. Hence, the usual end of month push to collect outstanding balances from customers.

  • Premises are a stepped cost – effectively they are suitable for a certain level of staff and by implication turnover of your business. Get too much floor space and it's additional wasted cost, get too little and you may need to find new or additional space. Leasing property often requires substantial deposit rent which as a commercial arrangement simply between your business and the landlord, it can be 6 months rent. Then there’s all the costs with maintaining the premises, Heat Light Power, Insurance, Security, Cleaning, Body corporate fees (If you’re in any formed of shared site of business buildings – for maintenance, depreciation, sinking funds, communal area heating, lighting power etc) and costs like business rates. Then on exiting the lease you have to reinstate to exactly how it was initially leased, replacing laminated floors in offices etc can be very expensive. Then there’s potentially substantial costs with any break of the lease. Legal costs to take out the lease, and for renewals. Premises are a substantial cost and needs to be carefully assessed and ideally capped (Charges, Rent increases during the lease) with maximum flexibility on your businesses side (Especially a break clause on your side only).

  • Finance can be another large area of recurrent spend/cash outflows. A new business generally should explode leasing on the basis of set up costs, and ease of ability to access credit. Company vehicles, Photocopiers, Telephony/Phone systems.

  • Technology with respect to IT (Information technology systems) is not as a material item as in previous decades with respect to running costs, however an initial setup can quickly mount. Most new businesses can run basic networked IT maintained by a local IT company providing expertise. A potentially large cost however can be the software required on the computers, these are often recurrent costs per seat (Employee).


Finally, this is why previously it was mentioned that any insight from the cost structures of a similar business or someone who has 'run the numbers' can be very useful. Other than that, you have to use the rule of thumb about likely costs (Top down approach) against a cost build of all the likely constituent elements (Bottom up approach).

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