Living a Lie: The mistakes that make entrepreneurs go broke

“You have to spend money to make money.”

“Maintain the image of success.”

“Fake it ’til you make it.”

There is an ideal of the successful entrepreneur as a jet-setting globetrotter, someone living high on their quickly-amassed profits earned through their brilliant business insight.  We want the overnight success and rock star-status of Richard Branson.  (Comparatively, Larry Ellison, who has over eight times the net worth of Branson, took a less meteoric path to wealth, and is relatively unheard of.)

The unfortunate side effect of our idolization of instant-millionaire entrepreneurs is that many have come to associate that glamorized lifestyle with proof of product value.  In other words, “If I look and act successful, people will assume I know what I’m doing and hire me for my services!”

Here are the four most common ways entrepreneurs blow money on an image.

“I’ve gotta get my name out there.”

Advertising is great.  Advertising is essential.  By all means, advertise!  However…

Don’t blow your budget on advertising.  While seeing your company on a billboard or hearing your name on the radio is a great feeling, don’t throw your money away on that illusion of the “big-time” without knowing for sure that you are going to get a good return on your investment.  This is a mistake we have seen time and time again.

I once personally witnessed a (now closed) local small business flush away thousands of dollars on a radio ad which they were convinced would result in a flood of customers to their large weekend sale.  They scheduled additional staff, opened early, and…no one showed.  The ad was ineffective.  In their frustration and desire to not have their money wasted, they played the ad on loop inside the store (i.e., the place where customers weren’t), succeeding only in driving their employees crazy.

For the majority of small businesses, big-budget ad campaigns are not worth it in the early days.  A local tv spot might make you feel like a celebrity (for better or for worse, given the quality of most local tv ads), but it cannot match the per-dollar effectiveness of a decent website, solid social media engagement, and positive word-of-mouth.

“I have to have a nice place to meet clients/customers.”

The information age has transformed the world, and the way we do business in it.  Meeting clients over coffee or lunch is a perfectly valid option, as is selling products online without a physical storefront.  However, many entrepreneurs still seem to feel as if their business is less legitimate without a physical location.

Rent on offices and storefronts is a significant monthly expense, and that does not include furnishings, utilities, etc. Having a separate workplace to travel to on a daily basis has mental benefits in improving productivity, but it is not a cost to be considered lightly, nor is it a business essential nowadays.  A gorgeous office with a big mahogany desk is a nice long-term goal, but it is not worth putting your company in the red.

“Yeah, I think I’ve got a place in the business for you.”

We have written before on the dangers of expanding too early.  However, this becomes doubly dangerous when owners begin creating positions for the sake of hiring friends and family.  Middle management, and other positions which are not directly involved in revenue generation, are rarely necessary in a young company.  It is good to be surrounded by people you like and trust, but, until your business has enough sustained profitability, employing people for positions you really can’t support is like inviting people onto a raft with a hole in it.  Everyone just starts sinking more quickly.

“The company’s buying dinner tonight.”

This is the big one and, really, the issue from which all the others stem.  It appears that, since the invention of commerce, owners have fallen prey to the temptation to treat the company as a personal piggy bank, not realizing that they are essentially robbing themselves.  Personal expenses being run through the company tanks profits, and can become risky from a tax perspective.  (Inaccurately deducting too many things as “business expenses” sends up a red flag to the IRS.)

In some cases, a failed understanding of accounting reports results in owners bankrupting their own companies.  For example, Owner’s Draw does not show up on a Profit & Loss report.  So, when an owner views the Profit & Loss report, they might see that the company is very profitable, and think everything is fine.  Meanwhile, their overspending is bleeding the business’s Retained Earnings dry.  When an unexpected setback occurs, they suddenly realize they’re out of money and the company goes belly up.

So what should you do?

Though stories of those who got rich quick are fun, it has to be accepted that, for the majority of us, success will be a longer journey.  Just as we individuals must live within our means, so much our businesses function within their budgets.  Slow and steady wins the race, a penny saved is a penny earned, etc.

“He worked hard and was patient, and eventually earned wealth and a comfortable lifestyle,” might not be the most exciting story, but it beats that tired tale of the guy who tried to have it all right away and lost everything.

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