Having stressed that leaders should have integrity and honesty, let’s look at some common mistakes made when businesses begin to show an increase in profits, expand their market share, and move into new products and territories. The issue is that mistakes can cripple a company, but not identifying such mistakes can have a multiplier effect, and then losses tend to increase in intensity.
A truism is that the more time you spend fixing issues, the less time you have to do your designated task, that is, to run your business. We will tackle how to fix issues in later chapters. After dozens of troubleshooting tasks during the past decade, the most common mistake, and arguably the most serious, is a lack of skill in managing a steady cash flow.
Cash Flow Is Always Critical
Simply put, without cash flow, your business comes to a standstill or, worse, crashes. Be diligent in preparing cash flow projections for ongoing operations and extraordinary items such as expansion of assets or movement into new areas. This is textbook theory. I prefer to add an additional factor, which is related to cash flow.
• A 6-month reserve. Entrepreneurs tend to underestimate how quickly cash flow can be depleted. You need to have enough cash to pay for daily expenses until your funds from sales flow in. Remember that it may take up to 90 days to get paid for your goods.
• While different industries and markets have varying time frames for payment of invoices, entrepreneurs must plan for inevitable delays in payments. This is the practical aspect of cash flow, which is seldom highlighted in textbooks. The answer is to be prepared, by developing a realistic business budget to ensure that your cash flow is sustainable for the first 6 months since you launched the business.
• Develop a list of potential expenses and ask bookkeepers, who operate in your industry, whether these are realistic. Bookkeepers are extremely familiar with daily operating expenses, often better equipped than auditors.
Some issues that cause cash flow problems are as follows:
• Sales are lower than expected. Your choices are limited without additional funds to carry out additional advertising and marketing. Therefore, your options are to assess why sales are lower than expected and take remedial action or cut costs.
• Costs increase faster than income generated. This is often due to productivity falling or input costs rising in response to a change in exchange rates, a hike in interest rates, or increased labor costs. These issues should have been anticipated before the beginning of the financial year. However, there are times when labor strikes cannot be resolved, affecting your source of raw materials. You must have contingency plans in place to offset such eventualities.
• Split between cash and credit sales. When you look at ratios, you must split your sales into cash and credit. It is pointless to say that your sales have improved by 80 percent in the past year if your credit sales make up 60 percent of sales and bad debts represent 50 percent of the credit sales.
Example: Your sales are $10,000, of which $6,000 is credit. This means that if 50 percent fail to pay, then your actual sales for the year were $7,000.
This can place your company under financial strain.
• Increased Competition. There is always the possibility that new competitors will enter your market, either directly or via acquisition or investment in the business of an existing competitor. Under such conditions, you have to neutralize competition with better services and possibly by offering lower prices for the short term. Remember that lowering your prices will impact your cash flow, so a careful analysis as to your break-even point must be carried out.
• Business cycles. When your business cycle turns, you need to have cost-cutting plans in place if you don’t have other products in a contracyclical business cycle that could offset the downturn.
• Inefficient sales team not achieving targets. Have a retrenchment package worked out by your human resources department (internal or outsourced) and implement it when necessary.
Looking at Additional Mistakes
• A great business will be here tomorrow: New entrepreneurs need to take a deep breath. Once you have completed market analysis and feasibility studies, you are keen to launch your business. Many textbooks instruct that it is critical to register your business before you start operations.
That is true, except that you don’t need to incorporate and register your business right away. If you set yourself a target of 3 months to register your business, you will find that you may wish to change the original company name, add new directors to your board, or even change your specific target market.
Once your 3 months are up, undertake all the rigorous legal documentation needed to properly launch your business.
• The difference between ostentatiousness and setting a value tone: Spending too much on office furniture and decorations will simply impact your cash flow. Your office should look presentable and emulate the market you’re in but keep expenses down. You can always upgrade decor when you have reached profit targets.
• The shotgun approach: Many entrepreneurs believe that they should control and have a hand in all facets of their business. The strength of successful businessmen and businesswomen is an ability to delegate. This doesn’t mean that you lose control of divisions or tasks. Rather, you gain time as you concentrate on your strengths as a leader, and you gain expertise by delegating tasks you are poor at to someone who is better equipped and skilled.
• Wishful versus realistic goals: The risk of setting unrealistic and unattainable profit goals creates expectations for staff that may demotivate them when bonuses are not paid on the back of failed targets.
Directors usually have profit-share schemes, and if targets are not attained, profit bonuses do not materialize. The essence is to set goals that can be achieved with the resources you have, which must be specific and, more importantly, can be measured within predetermined time frames.
Let’s not forget that new companies often have investors, who will be more than disappointed that you haven’t reached your targets, with some funders demanding their money back, as the norm is to link goals to loan and investment payback time frames.
• Not taking responsibility: As leader, it is your obligation to keep your word. Your staff, colleagues, associates, and funders are relying on you. So not researching sales objectives or not reaching the desired market penetration cannot be excused by pointing at competitors or current changing trends or legislation.
• Strike action or any of a multitude of other possibilities: Targets are not arbitrary numbers. These should have been derived after analysis of market trends, best-practice feasibilities, supply and demand, strength of the market, product substitutes, and so on. It is critical to carry these out prior to launching a business and you can use strategies such as Porter’s Five Forces and PESTEL analysis. Both are discussed in later chapters.
• Using experts: While it is always advisable to use experts in critical fields or accounting and law, there is nothing wrong with drafting your own documents and conducting your own research in the initial stages of your company’s development. The condition is that you use experts to verify your work. This saves on time-related costs charged by attorneys and auditors.
Ten Fundamental Historic Truisms
It is both a critical and a fundamental reality that launching a new business is a mixture of risk, excitement, and apprehension. The very fact that you are taking the time, effort, and major personal resources boils down to one basic question: Will my business succeed?
The essence of this book is to limit the risk of failure but also to answer that very question. The following are 10 of the most important directives to guide you to improve the answer to this basic question.
• Truism 1: Past performance is not a guarantee of future trends. Past trends in the industry you are planning to enter will help you to determine value and price of both products and the company. However, only an analysis of future trends based on environmental factors can guide you to choose your products and services. These factors are economics, business, politics, and technology. Each is important to determine whether your company will be successful or not.
For example, if you are risk averse and do not wish to be involved in a company that buys materials across borders, then stay away from currency-dependent commodities.
• Truism 2: Your product is just a product. The aim of your business is to make a profit, so don’t be trapped into an emotional attachment with your first product. If it doesn’t sell, then change the product. Many businessmen and businesswomen link their reason for starting a business to their first product. Such subjectivity can lead to poor business decisions, which can be harmful to your bottom line.
• Truism 3: Everyone aims for great. There are many businesses in the world that are good but only a few that have achieved greatness. As you gain experience and skill, you’ll learn to determine how to take your business to the next level. This is discussed in later chapters.
• Truism 4: The sum of the parts should be greater than the whole. Once you have launched your business, you need to understand how each part affects the whole. A successful leader learns to talk to his or her staff and build an understanding of the business and its functions from the ground up.
I once worked for a financial magazine whose editor-in-chief had no clue as to costs and, even worse, how those costs rose drastically if deadlines were not met. It became obvious that he had no interest in talking to the printers or the drivers who took the magazine copies to the airport. In this example, missing a deadline meant that printers charged overtime, and missing a flight meant that the magazine couldn’t be on sale in its destination town. Simply, higher costs together with lower sales are dire for cash flow.
• Truism 5: Interfering always results in creating more problems. It is often difficult to relinquish some control of the business to staff you have newly employed. Your task is to run the company, understand how all the parts fit together, and ensure that the status quo is viable and would integrate seamlessly into a bigger and more powerful company in the future.
• Truism 6: Products and services should be worked hard. Many companies have assets that are not as productive as they should be. In essence, many businesses possess certain assets that are not exploited. As such, sweating assets means getting the maximum use out of the assets you already possess. You can only really do this if you know how an asset affects other components of the company. Another way of sweating an asset to increase productivity is to use relevant technology.
• Truism 7: Use available IT. In order to grow any business, you must take advantage of technology—where can you access the technology, and what are the costs involved?
• Truism 8: Continually sell your business concept. Imagine a chance meeting with a highly respected venture capitalist in an elevator. You have maybe 2–3 minutes to “sell” your business concept.
There are three simple rules to accomplish this in any situation. First, you must be able to explain what your business does with clarity and ease. Second, to get their attention, you need to display true and honest passion for your business, and, finally, the lasting impression must be one of pride in what your business is achieving.
• Truism 9: If it’s broken—fix it, otherwise don’t change anything. A business that has no problems is a rare one indeed. This does not mean that it is impossible to have a company with no critical issues. So ensure that your company is regularly assessed, changed where required, and realigned for improved productivity.
• Truism 10: Your time with the company will come to an end. Truly successful businessmen start with the end in mind. They ask the question: “What are you starting this business for, and what is your aim? At some point, you will want to—or must—retire. Do you want to leave a legacy for your family or the business world? Do you want to make a difference, or do you just want to retire wealthy?”
Only you can state what that is. However, having the end in mind does set a tone for your business.
Rainmaker Observation: If there was an 11th Rule, it would be endurance. Entrepreneurship is not for the faint hearted, what with having to keep up with the multitude of daily demands from staff, clients, and investors and shareholders alike. While you may have employees to handle queries, the final decision will often rest with you, so make sure that you can handle the daily grind both mentally and physically. Issues often ignored in textbooks are nonquantifiable, like handling problems outside your comfort zone, weighing up the opportunity cost of working long hours, and sacrificing family time to attend meetings.