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.
How the Service Industry Prepares You for Entrepreneurship
Per the Department of Labor's Bureau of Labor Statistics, service industry jobs in America outnumber manufacturing jobs almost 10-to-1. In 2012, retail and hospitality employees numbered 28.6 million, with that number projected to grow to 31 million (a 10.7% increase) by 2022. Currently, almost 1-in-10 Americans work a service-based job.
With so many Americans in the service industry, it stands to reason that many of the entrepreneurs of the future are the retail and hospitality workers of today. All of us at The Bookkeeper have at one point in our lives bussed tables or ran a cash register. That's how we know there are several professional skills you develop in the service industry that better prepare you for life as an entrepreneur.
Service industry employees work with a sense of urgency. Few businesses are more fast-paced than a restaurant. Everyone, from the front-of-house to the kitchen, knows that tasks have to be completed immediately. The slightest delay in taking orders or prepping an entree can result in backlogs, unhappy customers, and decreased revenues. If you get anything resembling "down-time", you hustle to complete side work and other prep that can help you when you get busy again.
How can you make it work in entrepreneurship? Former service industry employees know how to keep busy. You do jobs as they come in, without putting off the more difficult or frustrating tasks. You are great at maximizing your free time, answering emails or promoting your business on social media in between meetings and assignments. Clients are often impressed at how quickly you complete projects and respond to their needs.
Working with urgency makes you better at prioritization. Three days before Christmas, the store is packed, the registers are backed up, three customers are waiting for help finding items, another customer is on phone line 1 while your district manager is waiting on line 2. What do you do first?
For someone who has never worked retail, this is the sort of nightmare scenario which makes the service industry seem all the more undesirable. For those of us who have been in this sort of situation, this hypothetical has an easy answer: Help the customers in the store first, then the customer on the phone, get back to the DM when you can. There's no way to please everyone right then, so deal with the immediate areas of need first.
How can you make it work in entrepreneurship? You learn what fires need to be put out immediately and which ones can smoke a little while longer. You have an innate knack for putting your to-do list in the perfect order so you can do all you need to while keeping everyone as happy as possible.
You develop customer service skills and a thick skin simultaneously. It is no secret that employees in the service industry are often treated terribly by customers. Service industry workers are frequently (sometimes daily) required to withstand being verbally berated, not only without retaliating, but smiling throughout and heartily apologizing afterward (regardless of whether they personally have done anything wrong). Over time, you get better at both anticipating customers' needs and moods (thus avoiding such tirades) and letting verbal abuse roll off your back.
How can you make it work in entrepreneurship? Many small business owners have an incident or two where they face unwarranted criticism, whether it be an unfair Yelp review or bad word-of-mouth from a client fired for non-payment. Though the initial desire may be to fire back at whoever is spreading lies and gossip about you, this rarely works out well. (See the Amy's Baking Company fiasco.)
The better (though less initially satisfying) option is to prove your disparagers wrong with your continued professionalism and exceptional customer service. By refusing to let others drag you down into the muck, you keep your company's reputation so sterling that no mud slung can stick to it.
You become prepared for anything. Anyone who has worked in the service industry for even a few months has at least one crazy story, something virtually unbelievable. I have several, but my favorite remains the customer who became disgruntled when she spilled her alcoholic beverage.
This was not in a restaurant. It was in a dog grooming salon.
She spilled her drink because she was carrying it in a regular, open-topped glass. Loose in her purse.
Again, this was an adult woman, and not a toddler. Concepts like "liquid" and "gravity" should not have been a mystery to her, yet she was shocked and infuriated (at me) that her mojito had tipped over and was soaking through the bottom of her very expensive shoulder bag.
How can you make it work in entrepreneurship? Once you have had the experience of fetching towels to help a woman clean rum out of the bottom of a Dolce & Gabbana bag, and have apologized because she didn't believe the towels looked clean enough, few things can throw you off your game anymore. Deadlines being moved up or employee sick days just become minor hiccups, instead of major obstacles, and you develop an air of unflappability that instills confidence in clients. Remaining composed in the face of extraordinary circumstances is a hallmark of a great entrepreneur, and surviving the service industry lets you enter the game with that skill already equipped.
The Financial Reasons Small Businesses Fail
Almost every entrepreneur has heard the statistic: 80% of small businesses fail. There are many reasons this happens, and can include everything from market slumps to lazy owners. To enumerate every way a business can go under would be an endless, impossible task.
However, there are a few financial characteristics frequently found in struggling businesses. Here are the most common financial reasons small businesses fail.
There's no plan. It's not uncommon to meet new small business owners who have a brilliant product idea, a well-developed marketing plan, a slick website, and not one thought given to their budget. We've already written on the tough financial questions to answer before starting your own business, but the importance of a solid financial bedrock cannot be overemphasized. A well-researched budget and fixed goals is the key to surviving that crucial first year in which most businesses go under. Great customer service and spot-on marketing are not enough to balance out shaky financials.
Speaking of customer service...
Poor credit management and pricing strategies are bad for everyone. No one craves popularity like an entrepreneur and, when your business's success is entwined with how well-liked you are, the urge to avoid offending anyone becomes even stronger. In the early days of a business, when there are only a few customers, there is a common impulse to let clients slide on late payments, or to offer frequent "friends and family" discounts. It's easy to justify this with the logic with the idea that you need to establish customer loyalty, and you can tighten the reins a bit when you have a solid customer base. There are a few reasons this doesn't work:
- Clients who don't pay on time aren't going to appreciate the slack you've given them in the past; they are going to resent the restrictions you enforce in the future.
- Likewise, your patrons who are just coming to you for the lowest price will quickly go elsewhere when your rates rise.
Lenient accounts receivable and cheap pricing might gain you a quick boost in early sales, but they are not a sustainable model. Delivering a product you can be proud of, at a price that is worth your hard work and can keep your business afloat (and actually requiring customers pay you that fair price) ensures that your customers the pleasure of patronizing your business for years to come. Because you have to remember...
Cash is king. Yes, it's a cliche, but that doesn't make it any less true. A great business model matters little if you run out of money before you can implement it. Managing cash flow is key to not just the health but the continued existence of your business. Here are a few of the most common cash pitfalls small businesses face:
1.) Insufficient capital. In all likelihood, your business will not be immediately profitable. So not only do you need enough cash to get your business started, but you need enough to allow yourself to operate at a loss for a while.
2.) Not having a large enough cash cushion. Think "Princess & the Pea" levels of padding. Regardless of how well you plan, the economy is unpredictable. Look to history for examples. No one expected the Boston Molasses flood which, in addition to the damage caused and lives lost, resulted in a nearly $11M settlement (in today's money) for the responsible company.
3.) Over-investing in fixed assets. It's great to plan for the long-term but, if you don't plan for the short-term as well, your business will not get a long-term. Sacrificing too much of your cash for something like manufacturing equipment (even if you're getting a great deal) can hurt you, as that is not a liquid asset and will be of no help to you in the event of an emergency (i.e. your factory flooding a major metropolis with 2.3M gallons of molasses). Think of it like a game of Monopoly; if you start building hotels too soon and suddenly need cash, you're stuck selling all your buildings back to the bank for half-price, and you know bankruptcy is right around the corner. Only, in real business, instead of losing yet another game to your annoying brother-in-law, you've lost your entire livelihood.
Expanding your business is the ultimate goal, but maintaining cash flow gives you the solid foundation you need to build upon.
80% of new businesses fail, but that means 20% succeed. To be that 1 out of 5, have a plan, know your value, and remain patient. Better to start small and grow something big than to start too big and dwindle away.
Marketing to Customers (Who Aren't You)
Growing your business is an exciting challenge. It's a time when you're ready to take on new customers, and you feel like you're ready for that "next step".
Of course, if you've been only working with a few close clients or through word-of-mouth, you may find it difficult marketing and networking with people outside your social circle. That's understandable; it's easier and more comfortable working with people with whom you have a lot in common.
However, diversity amongst customers is necessary to really expand your business, and is a great way to avoid having all your "eggs in one basket". But even mega corporations fall victim to major mistakes when it comes to marketing to a diverse audience. Here are some "do"s and "don't"s for reaching customers who are nothing like you.
Do your research.
There is an enduring (if slightly ridiculous) urban legend about General Motors expanding into international sales. The legend goes that attempts to market the Chevy Nova in South American countries met with failure because no va in Spanish means "doesn't go".
According to popular web aggregator of urban legends Snopes.com, this tale is a myth. And, upon further inspection, that makes sense. After all, even in the '70s, surely GM would have had someone fluent enough in Spanish to alert higher-ups about the possible translation issue? Besides, even if the Nova legend were true, we savvy businesspeople of the 21st century surely know better now.
Enter, Twitter. Though most Americans have a passing colloquial knowledge of Spanish now, in the digital era, technology has created a communications gap that spans generations instead of nationalities.
Now, there have too been too many Twitter scandals to ennumerate, but a recent marketing disaster illustrates just how bad it can be when a company tries to hitch onto a trend they haven't fully researched. When the #whyIstayed hashtag began trending, with former victims of domestic violence listing the reasons why they didn't immediately leave abusive partners, pizza company Digiorno tweeted, "#whyIstayed You had pizza."
Of course, Digiorno did not mean to make light of domestic abuse, and immediately issued an apology with the explanation that they hadn't read what the hashtag was about before posting. So failure to perform roughly 30 seconds of research resulted in a marketing disaster.
Don't be needlessly specific in your marketing.
Companies often seem to think they need to change their message in order to reach a new audience. Here they enter a minefield of marketing hazards, frequently falling prey to tropes and stereotypes, alienating the people whom they'd wished to include.
We have Bic to thank for the most hilarious trainwreck in unnecessarily-pointed marketing. When Bic came out with a line of "For Her" pens, they were flooded with sarcastic Amazon reviews. Customers rightly (and very snarkily) questioned why men and women would require distinct writing utensils. Bic's attempt at marketing toward a specific audience had unintentionally come across as condescending and ridiculous.
Whoever the customers you're trying to reach are, your company hasn't changed. So instead of changing the message about the benefits and values of your brand, change your marketing channels. Advertise in different channels, or across different platforms. If you use physical signage or flyers, try different locations. Just whatever you do...
Do be genuine.
Think back to your favorite high school teacher. You're probably thinking of someone who inspired you; someone who took an honest interest in your goals and success.
Now think back to that high school teacher who wanted desperately to be liked by their students. Who tried too hard to be cool by talking and acting like a teenage and, as a result, was respected by no one.
So frequently when companies try to market outside of their comfort zone, they follow the cringe-inducing pattern of the second example, awkwardly squeezing into ill-fitting jargon and trends. I will never forget a local tv ad, infamous in our area, for its inclusion of a senior citizen quoting, "Whoop, there it is!"
The ad was for a furniture retailer, and I doubt they attracted any new young customers through that awkward reference to an outdated rap song. They would have been better served by providing something relevant and of value, for instance, payment plans for customers without established credit.
When you look at it closely, marketing to a diverse set of customers really isn't that different from how you market to anyone. By keeping the focus on your brand and the value you provide, you can maintain integrity and avoid any awkward pitfalls.