Most Common Mistakes Made by Small Business Owners

We at Herman S. Cage & Associates have served all types of small businesses in virtually every sector—from manufacturing, to consulting to retail products and services. Over the years, he has identified key mistakes made by small business owners in every sector. Here are six of the most common.

  • Siphoning profits for personal lifestyle. Pay yourself a salary and live within your means. Squandering profits on expensive trips, that sailboat or European sports car that you always wanted, has opportunity costs. At best, this practice can leave you strapped for reserves and at worst, it can starve your business of critical capital and decrease your capacity to reach financial goals. Always use profits strategically—to build your business or acquire long-term assets.
  • Making relative mistakes. Sometimes they’re cheap and convenient. Other times they’re over paid and under worked. Many times small businesses employ friends and relatives out of obligation or guilt, but keep in mind that a business exists to make profits, not to run an employment service. Even when a relative appears to be qualified, in most cases, it’s still a bad decision. Relatives can negatively impact business operations in a number of ways—through their sense of entitlement, transferring the dynamics of the personal relationship into the workplace, lackadaisical attitude and/or poor performance. If you sincerely believe that a relative is a good fit for a position, start by thoroughly vetting the prospective employee before hiring him or her. This includes carefully reviewing qualifications against the position, asking for and checking references, setting ground rules, and communicating your expectations and job performance requirements. This will send the message that you’re serious and he/she must be as well.
  • Hiring Staff for Staff’s Sake. This is related to number 2. Small business owners often find their payrolls packed with receptionists, clerks, office managers and other ancillary staff who are doing nothing more than making it more challenging to meet payroll. Whether you’re experiencing modest growth or a boom, never hire a new staff member or create a new position unless the new hire meets one of two criteria: generates income or reduces expenses above and beyond his/her costs.
  • Falling into the “This used to be fun, but now it’s work and it doesn’t even pay well” trap. One sure way for a business to die a slow, painful death is to increase activity rather than productivity. A common predicament for small business owners is operations that are growing by leaps and bounds, and profits that are not. In the first year of operations, the business grossed $200,000, with a 50 percent profit margin. By the fifth year, the business is grossing $2 million annually with $100,000 profit, but more overhead, expenses, employees and headaches than ever. Remember, to keep an eye on the bottom line. Carefully evaluate all expenditures, including hidden and on-going costs, and make sure the additional costs don’t eat into your profit margin. Take on additional costs—whether it’s more office space or upgrading software—only if there is additional revenue associated with that cost.
  • Failing to deal with the 800 pound gorilla. This analogy is more apt for small business owners than it is for individuals. The reason, in general, businesses have more control over their cash flow, allocations, expenditures and operations than do individuals. Every single business decision has favorable or unfavorable tax implications. Taking a proactive approach to the 800 pound gorilla by integrating a tax strategy into your business plans and operations that helps the business experience faster and more sustained growth.
  • Dropping the ball when passing the gavel. Every small business needs transitional planning. For family-owned businesses, it’s succession. For others, it’s an exit strategy. Failure to prepare means that the business (and your legacy) may not survive—for a second generation or a second owner. Start the process five years before you’re ready to relinquish control. Next, decide whether your goal is to turn it over to individuals already involved in the business or to sell. The next step is to identify action items to accomplish the desired outcome. This requires time and expertise. If you don’t feel you have both, you need to hire an expert with the requisite skill set to evaluate your business worth, operations and develop a plan.