There isn’t a company out there that does everything perfectly. They all make mistakes. To prevent repeating common mistakes that cross all types of businesses you have to learn from what other people have already figured out. Yes, that’s right, do as I say, not as I did! It’s the old common parental saying. Don’t repeat someone’s previous mistakes, learn from them.
So how do you go about doing that? There are two key approaches to learning from others mistakes. One, talk to people you know who have blazed the trail before you. Second, read all you can about common business mistakes, as the sources out there are endless. Let’s touch on just a few of those common mistakes here.
#1 Having informal agreements with business partners
You may have a colleague or friend who wants to invest in your business. You need the cash so you think, what the heck and you both shake on it. Mistake number one, don’t do business differently with your friends than you would with a stranger. In the end, formally documenting your business partnership will prevent miscommunication, disagreements, broken friendships, and even lawsuits in the future. When your business starts making a lot of money, you’ll need this to keep the record straight. If you need to revisit the arrangement and change it, great. You can do that by amending the original agreement, as long as you both agree.
The same thing goes for relationships with suppliers and vendors, especially in foreign countries. You may be trying to earn the trust of someone from a different culture that is skittish about potentially working with you. Red flag! If they aren’t willing to document your relationship formally, they likely aren’t the partner you want to be working with down the road when you get bigger.
For example, if you don’t document your pricing, sure, you may be able to strong arm them into keeping your hand shake agreement in the beginning when you are both starting out. However, what happens when there is a discrepancy down the road when the volumes have grown substantially? They change the price on you and give you a good reason for it, but it’s not something you would have agreed to. Wouldn’t a formal agreement in advance prevent a lot of relationship damage control and time wasted back at the negotiating table? What if you leave that negotiating table worse off than before, or worse the relationship is irreparable?
#2 Not putting sound accounting practices in place from the start
To many entrepreneurs, accounting is an afterthought. They think, “I don’t plan on bringing in additional investors any time soon or I don’t need an audit, why do I need to have full blown accounting support? I can pay the bills myself.”
Accounting is not just paying the bills. For one reason, if you don’t know the rules, you may provide your tax CPA incorrect information that would lead to an incorrect tax return. The IRS does not look kindly on companies trying to save money without an accounting function.
Having a solid accounting function doesn’t have to mean an in-house full-time staff. There are many fractional accounting support firms that can help supplement this function or provide it all together. What it can provide for you is:
- Timely information about what is going on with your business, such as key revenue and spending drivers
- Which customers are good customers and those you should quickly unwind?
- How long will your current cash position last you?
- Am I in compliance with all tax and labor laws?
- Is the right language being included on all my contracts? (lawyers are protecting you from lawsuit, not from bad business decisions)
- Will I have enough inventory to make the sale next month?
These are just a few examples, but there are so many more. In the end, accounting is not an unjustified overhead expense. Accounting is your right hand in running the business.
#3 Hiring the wrong people and then keeping them too long
By all means, don’t hire your friend to do your accounting if their background is marketing. Yes, they are both from the business program at your local university, but they are not the same thing. Again, working with your friends is ok, but hire people that have the skills you need from the beginning. Don’t hire someone today thinking you’ll replace them when you get bigger. All you are asking for is a mess for the next person to clean up. Sure, it may save you some money on the front end, but it will cost you more in the end. This goes not just for accounting but all positions. Hire people with experience for the position.
If you do hire someone that is cheap and inexperienced, don’t keep them around longer than you should because they have been loyal to you and dependable. When it’s time for your company to move to the next level, either find something else for them to do or respectfully send them on their way to a new adventure. You aren’t doing them any favors either by keeping them in a job that will quickly be over their head.
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