Business bust: The biggest mistakes that are killing your businessBlog, 02/02/18
This is the bitter truth – 9 out of 10 businesses fail every time.
You hear stories of entrepreneurs and business owners going bust every day, definitely more than the stories of successes and million-dollar exits. To put it down to one mistake would be ignorant; instead, businesses often fail because of multiple, devastating mistakes.
If you pay attention, businesses are always falling into the same traps again and again. Know this; if you can avoid these mistakes that we’re going to mention later on in the article, the chances of your company being successful is going to increase a lot and that’s not an exaggeration.
So, why are business owners more prone to failure?
In a nutshell, entrepreneurs are optimistic and naturally risky people. To put it into perspective, only an entrepreneur would put his heart, soul, hard-earned cash and seemingly infinite effort into something that is more likely to fail than succeed.
While the media tends to focus on hard work and motivation as the #1 key to success, successful business owners know there’s more to success than working hard. Basically, you have to work hard to achieve your success goals but you must also work smart to avoid pitfalls along the way.
Enthusiasm can be the factor that gives a business the extra boost it needs but it can also be the one that breaks it down to the point of no return. Passion for your business will help you achieve success, but it can also drive you to make poor decisions which are crucial in determining the health of your business.
Don’t think that you’ve made a mistake before? You might be very wrong…
As humans, we all have a certain degree of ignorance in ourselves. The universal approach to learning is by failing and learning from your mistakes, both in theory and in practice.
In fact, learning from mistakes is a common factor in many success stories. It is not unheard of for a billionaire or conglomerate to have multiple failures in the past before they make it big (e.g Bill Gates).
The big problem, however, is learning from those mistakes. The two things that cause this is the Dunning-Kruger effect and hindsight bias.
What is the Dunning-Kruger effect?
Naturally, some people are smarter and more intelligent than others. That’s perfectly fine as it’s natural, just like how some people are taller, fatter, or has broader shoulders than you.
However, the Dunning-Kruger effect happens when people are unaware of their limitations or weaknesses. For example, an individual may regard himself or herself as incredibly smart when in reality, the individual is average at best.
Why does this happen?
When people try new things, they usually are not good at what they’re doing. For example, it’s extremely unlikely for a person who has never skated before to glide in an ice rink without falling.
On the other hand, people who are really good at something may underestimate themselves by thinking that the skill they have is easily learned. Because of this, they tend to underestimate how much they really know about the topic or skill because they are so good.
To put it in technical terms, smart people realise they’re not very good and try to put in more effort to become. People who aren’t smart, however, don’t know that they’re not very good, and instead think of themselves too highly.
What happens then?
They don’t try to get better because they think they are good enough already. When there’s no effort to become a better person, it is nearly impossible for that said person to actually learn something.
This happens because beginners underestimate the skill required to do a specific task (like running a business for example) because they are unaware of its complexity. This is why there are so many people who seem to know a lot about running a business but do not actually run one themselves.
On the other hand, skilled people underestimate their own skill because they assume that the skill is easily learned and they reach a level where they start to see how little they know about the topic at hand.
Knowledgeable people are also always unsure of themselves, because they are smart enough to be aware of making mistakes. As humans, we make a lot of mistakes so being aware of that is extremely important so that you can make good decisions.
A good way to explain the Dunning-Kruger effect is by using a scenario which most of you have probably seen at least once in your lifetime:
Imagine that Starbucks goes bankrupt tomorrow.
An outsider may critic the Starbucks management for failing to stay profitable despite being a massive franchise all over the world. This person will chime in with his opinion on how to make Starbucks profitable, what business plans to make in order to save the business, and other things that relates to the business.
The catch is that this particular outsider has never ran a business before nor does he have any certifications or qualifications in a business-related area.
While his ideas may sound good, the outsider does not have practical or theoretical experience of running a business, he has not studied about business before, and he does not know what happened behind the scenes at Starbucks. He basically knows nothing.
A financial analyst who is working with Starbucks’ financial department also catches wind of the news.
Unlike the outsider, the analyst immediately blames or at least doubts himself for the company’s failure. Although he is involved in the business process as well as having numerous certificates in a financial background, the analyst feels that he should have done better.
This effect can happen in your business as well. If the business has been slowing down recently, why not take a cold, hard look at yourself instead of blaming your sales or marketing team for it?
If you don’t think you’ve made a mistake before, try to think back of moments where you missed an opportunity or failed to meet a certain goal. We guarantee that you’ll eventually find something that happened because of YOUR fault.
As a business owner or a boss, you’re not immune to mistakes. In fact, you’re probably not even the smartest guy in your office.
This is why companies find top talents to fill roles in their departments. There will be a time where you have to accept that there are many people out there who are much smarter than you and better at what you do.
In addition to the Dunning-Kruger effect, hindsight bias is another thing to look out for among business owners.
What is the hindsight bias?
Have you ever noticed that events feel more predictable after they have already happened?
When Donald Trump was elected as US president for example, many US residents felt that they knew it was happening although the consensus was massively different a few months before that.
In other words, things always seem more obvious and predictable after they happen, never before. This is referred to as hindsight bias in psychology and it can take a toll on your business decisions, believe it or not.
After an event, people often believe that they knew the outcome of the event before it actually happened. In other words, if you’ve felt like you “knew it all along”, that is hindsight bias in practice.
The problem is this; we don’t actually “know it all along”, we only feel that way.
There are 3 types of hindsight bias which happens to all of us:
- Memory distortion. Incorrectly remembering an earlier opinion e.g “I said this would happen” although you said or thought of something else.
- Inevitability. A belief that an event is going to happen e.g “It will happen” although you’re unsure of whether it can actually happen or not.
- Foreseeability. A belief that you can predict an event e.g “I knew this was going to happen” although you have no guarantee of it happening.
Hindsight bias matters a lot to any business because it gets in the way of learning from your failures.
If you feel like you knew it all along, you won’t stop and take a second to think why something went wrong. You also fall into a narrative thinking that you can avoid mistakes before you know what’s going to happen.
Another mistake that can happen because of hindsight bias is overconfidence. If you falsely believe that you are going to succeed, you might become too confident and are more likely to take unnecessary risks.
Such risks might be financial, such as basing your business model off a risky client or product. The risks might also be emotional such as making a business decision based off your emotions rather than logic.
Overconfident entrepreneurs are also more likely to begin risky and likely-to-fail ventures compared to calm and collected ones.
9 biggest mistakes that are killing your business
Now that we’ve got that out of the way, let’s focus on actual mistakes that you can fix right now to save your business.
1) Not spending a dime on professional advice
You have to trust us when we say this: nothing is more expensive than a cheap lawyer or accountant.
This is famously depicted by the fast, cheap, and good trifecta.
As a new business owner, it is logical to cut costs as much as possible to increase your margins and reduce your expenses. One exception to this is professional advice like a lawyer, accountant, or the authorities.
Of course, every accountant is a CPA and every lawyer is BAR certified. However, having a qualification doesn’t mean they’re knowledgeable in your life, just like how having a business degree doesn’t guarantee you a successful business.
This advice goes beyond professionals like lawyers or accountants. It also applies to things that you’ll learn to avoid mistakes.
Whenever you start something new or venture into a new niche, it is wise to spend your money to learn from people who’ve been through what you’re going to experience.
For example, if you have to pay $1,000 to meet an experienced consultant who can help you to avoid a $100,000 mistake that needs a month to fix in the future, wouldn’t that be a great investment?
With all due respect, you’re not great at everything because it’s impossible. Every aspect of your business should be done perfectly especially the tough things like taxes and legal issues – you cannot expect yourself to be able to do everything!
So where it really matters, don’t rely on some free online guide or think you can handle it yourself. It is wise to find an expert whose job is to know exactly what you need to do.
For example, if you don’t pay attention to things in your client’s contract like the cancellation terms or scope of work, that could hurt you in the long run where you might lose money thanks to a shady contract which seems fine to the untrained person.
In a nutshell, don’t be afraid of spending on professional advice – you’ll need it.
2) Following advice too bluntly
Another common business mistake that many business owners and entrepreneurs do is by blindly following advice whether it’s professional or from a friend who runs a business in another field.
Yes, we know this point contradicts the one we mentioned above (seek professional advice) but we never told you to follow everything a professional says to a T.
While you should always get professional advice, it’s important to be objective and smart about it and put the advice in the framework of your business. Just because you heard it from an expert, doesn’t mean you should follow every single word of it.
The best option is to gather multiple opinions and do your best to make an informed decision based on the feedback you’ve gathered.
3) Putting on rose-tinted glasses for your product or service
When you create a product, you will have a bias towards it. In fact, you might even think that it’s the best product on the market!
While that’s great for your ego and self-confidence, it’s important to not lose sight of all the work that could be done to improve the product. At the same point, it’s also important to not be too much of a perfectionist for your product.
Finding a healthy balance between knowing what needs to be perfect and what does not is going to help you a lot in your career.
Also, you have to realize that sometimes with your business ideas or plans, you’re moving the wrong way or you’re pushing into a diamond wall that you’re never going to break through.
This mistake is very common among first-time entrepreneurs and people entering a market they’re not familiar with. You need to be aware of the mistake of liking your idea so much that you can’t recognise how much it’s failing.
A good way to avoid this is by evaluating how your product fits in the market. Perhaps you could run experiments on what tactics or product draws in the most sales for your business. You could also try multiple marketing tactics to find out which one works best to make sales.
4) Not spending enough on marketing
When we meet with new entrepreneurs, it always surprises us how marketing is always one of the lowest priorities.
Marketing is the number one thing for businesses to get more sales!
You should always have a budget and plan for marketing, especially when you’re a new business. If you want to make more sales, that budget has to be bigger and your plan has to be even more elaborate.
One of the biggest reasons why new entrepreneurs do not have a marketing budget is because they cannot figure out the ROI of their spending. For example, new business owners find it hard to come up with a target for their marketing budget.
Is it 100% of their ad spend? Number of sales? How many people signs up for a trial?
All of this is solved by using data and actually tracking your marketing channels. If you know your audience and numbers, then it becomes easy to acquire new customers which should be a priority for businesses.
One vital part of any successful marketing campaign is understanding who your ideal customer is. It’s not enough to create a marketing budget and try a little bit of everything. You need to do market research to identify who you are trying to reach, where you can find them and how they will react to your marketing activities.
5) Paying yourself little to no money
A very common business mistake that new and even seasoned entrepreneurs make is having their salary to almost poverty levels.
Often these business owners tend to pay themselves very low because they believe that it will give them more capital for growth. Yes, that’s partially true but you should never overdo it.
The downside is when you pay yourself so low, you are hoping on cashing the profits as your income. This hurts the much needed separation between your savings and business funds in your business account.
You still have to live, right? It’s better to pay yourself a decent (at least industry level) salary and keep a separate savings account, so you don’t have to tap into business funds to fund your personal spending when you have an emergency.
6) Overspending and underspending
Overspending is a very common business mistake that you should stop doing now! In general, it pays to be conservative in your spending until your business has a consistent track record of profits.
Some common things that many business owners think they need but is not necessary include:
- Business class flights and hotel tickets when just an economy ticket is enough
- Fancy, unnecessary equipment like pool tables, multiple MacBooks, or a video camera that you’ll never use
- Expensive business meals and dinners
You should be wary of taking on debt; as a new business owner you’ll almost always have to sign a personal guarantee on the amount you borrow from the bank. Again, if you really need to get a credit card loan, make sure you can pay it back immediately.
Starting a business doesn’t have to require a large investment, but some new business owners fall into the trap in thinking that they need to spend a lot to purchase the best of the best everything from equipment, to software.
There are usually other, less expensive but equally viable options available, if you’re willing to do the research on what you need. Creating and sticking to a business budget to curb overspending is always an excellent idea especially in the early stages of your business where you don’t have too much cash flow.
On the other hand, there are small business owners who don’t overspend but instead fall on the other end of the spectrum and refuse to spend anything at all!
While there are certainly ways to start and grow a business with limited funds, going too far and not investing any kind of capital in your business can severely limit your potential for success.
Remember, it takes money to make money.
7) Not delegating tasks
You may be willing to learn how to be a jack of all trades and do everything on your own, but it doesn’t (and shouldn’t) have to be that way.
Effective delegation can be one of the best ways for you to build your business and free up time for business activities that require your unique expertise. It can also build a team positioned for future success by letting them experience running the business.
It’s probably one of the most common dilemmas in running a business: Rather than give up control and trust others to take the reins, you try to do everything yourself and ultimately fail.
The instinct is understandable, of course; most business owners are very strategic, so they don’t want to have the worry of someone messing up and risking your grand plan of the business – correct?
So, what should you do?
Delegate your tasks smartly for a start. Start by drawing up processes, almost like a guidebook for how to do things the way they should be done to your employees. That way you’ll feel more confident and your employees will have the guidance they need to do your tasks.
8) Not being committed enough
Starting a business requires a number of success-oriented character traits such as drive, dedication and a huge amount of commitment.
You need to be willing to make sacrifices, put in the time necessary, and face challenges head-on if you want your business to be successful.
Don’t be afraid of failure because we all make mistakes. The key is being aware of them and staying focused to make smart, well-informed decisions in your business. If you can do that, and remain resilient when you do make a mistake, success will be within your reach.
9) Not looking at data or not even using analytics
Yes, having the belief to succeed is good but you also need to actually crunch some numbers and figure out if you will succeed.
There has to be data that validates whether your business plan is real, or at least provides an indicator of how it is going to perform. Once you collect that data, use it to create key performance indicators or milestones to show how your idea or business is progressing.
Regardless of your business’s sales process, data is available that can help you understand how your salespeople are performing.
POS systems, for example, use data to allow you to access high-level information like total sales and profit margins for a given time period. You can also use filters to understand more specific details like what inventory items sell best and what times of day are busiest.
Businesses with a long sales cycle can also take advantage of data to improve sales. Using a CRM system or some other sales software you can learn what tactics are effective at moving prospects through your sales funnel. You can then make optimisations that lead to even more sales.
You can also use business data from a variety of sources to learn what channels (Facebook, Twitter, etc.) and campaigns convince people to pay for your business. Using this information, your marketing budget can be spent on the highest performing tactics without the risks of losing money.
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