10 deadly sins that'll wreck your business - common small-business mistakes

Home Office Computing, Oct, 1993 by Linda Stern

Sadly, I'm watching the law firm run by two close friends shudder and shrink. Mark and Susan (not their real names) are dynamic attorneys, but they committed the cardinal sin of running a business: They let their overhead get out of hand.

Actually, they committed several deadly sins. Besides taking on too many employees and renting an overly large office during a period of rapid expansion, they let one case (that they were doing pro bono) take up too much of their billable time. They charged clients fixed fees for projects that ended up taking a lot more time and resources than they expected. And they found themselves giving far too much free advice.

Consumed as they were with the law, they just kept chugging on, unaware they were making a series of classic mistakes.

I have high hopes for my friends and their law firm. They are going back to basics now, shrinking the practice to a necessary core group of employees. They are subletting some of their office space and thinking of moving their office back home, where they began. They are repricing their services and refocusing their marketing efforts.

In the long run, they'll be fine. They will either rediscover the less-is-more philosophy of their salad days and build a stress-reduced life around a smaller firm, or they will rebuild their practice, smarter and more successful, the second time around.

GREAT WAYS TO SCREW UP

Mark and Susan won't be the first business owners to learn their lessons the hard way. We all make mistakes, and unfortunately, it seems we all learn best those lessons we inflict upon ourselves. In the interest of saving time and pain, I've listed here the 10 most common and deadly small-business sins. Err if you must, but avoid this killer list and you'll be well on your way to prosperity and success.

1. Overspend on overhead. This is probably the single worst mistake that fledgling businesses make. "Don't spend a dime until you absolutely have to and can't do it any other way," says Bernard Tenenbaum, rounding director of the George Rothman Institute of Entrepreneurial Studies at Fairleigh Dickenson University in Madison, New Jersey. Avoid hiring employees until it is absolutely necessary. That means do your best to contract out work and use answering services, sheltered workshops, part-time high school students, and the like.

2. Buy too much, too little, or just the wrong kind of equipment. "The one mistake I see over and over is that people have a tendency to buy everything all at once, before they are clear on what they need," notes Kimberly Stansell, a Los Angeles researcher and publisher of the Bootstrappin' Entrepreneur, a newsletter for people starting businesses on shoestrings. One of Stansell's subscribers bought a computer close to a year ago and has yet to use it. "She spent all those resources that she could have been putting into her business," laments Stansell.

Alex Brager, a CPA with the Rockville, Maryland, firm of Aronson, Fetridge, Weigle & Schimel, sees another kind of equipment mistake. "People buy something now that takes care of their needs, but if they took the time to plan, they would see it really isn't going to be sufficient very far down the road."

Particularly when it comes to computers, people like to argue about whether you are better off buying the low-cost model that does what you really need or the high-end model that does everything you'd ever want to do. There's no standard answer. Figure out exactly what you want your equipment to do over the next five years, suggests Brager, and then buy the equipment that will do it.

3. Dance with the wrong kind of client. Who among us hasn't wasted time doing the mating dance with a client who refused to kiss us in the end? Or worse, who availed themselves of our services and goods, but then didn't pay? Part of that dance continues always; it's a cost of doing business. But part of the dance is a reluctance to cut off any potential customers, even if their approach doesn't quite seem right. "It comes from a fear of not getting enough business," says Brager.

Learn to trust your gut; years of practice will tell you that the client you didn't feel quite right about is usually the one who ends up being a problem. "A business starting out should be checking the references of new customers," asserts Brager. "Especially for those businesses that sell goods, doing business with customers who aren't really sound can put them out of business quicker than anything else."

4. Charge too little. A related mistake is made by business owners who fill their days with work for low-paying clients or who win clients by positioning themselves as the lowest-cost guy on the block.

There are two ways to price, informs Tenenbaum--pricing to market or pricing cost plus a markup. "Most small and home-based businesspeople say, "Well, it only costs me this much to be in business, so I only need to charge this much." Wrong!" says Tenenbaum. "There's a reason for a market price, so use it."

Study what your competitors charge, and set your fees comfortably closer to the midpoint. Make sure that you define your business by some quality identifier--the key service you provide, your speed, your knowledge, or your talent.