Owning a small business can be tough. Company founders come from different backgrounds and have different strengths. Sometimes their financial knowledge is a little bit weak. During an early startup, even things you know you should do can fall by the wayside. You might be so deep in product development mode that financial and accounting matters feel less important. Early on at HealthJoy, we were pretty lousy about turning in expense reports and dealing with some basic bookkeeping (we’ve since automated the process with Concur.com and a few other tools). The problem is that kicking the can down the road only makes dealing with the issue a bigger time suck than it needs to be. It’s always better to deal with it correctly from the start before anything gets out of hand.
Miscalculating Your Burn Rate – Your burn rate is the amount of capital you spend every month to keep the lights on and run your business. If you’re a new business, chances are you aren’t profitable yet, and if you don’t have a good understanding of your burn rate, you might find yourself in hot water. According to a Hiscox small business survey, 32% of small businesses underestimate their monthly expenses and 18% feel they didn’t secure enough financing. As you can guess, this can be a deadly combination. Being undercapitalized is one of the main reasons businesses fail. It takes time to develop reliable streams of revenue, track your numbers, compare against your forecasts, and adjust your forecasts with real-world numbers. You need a large enough runway to develop a thriving business.
Hiring Too Quickly – Employees are the biggest expense for most companies. At HealthJoy, we try to keep things as lean as possible and never hire in anticipation of sales and revenue. For some roles, we’ve hired people on a trial basis to see if they match our company values. When we do hire a new employee, we make sure that we’re filling the position that will make the greatest impact on the company.
Paying for “Nice-to-Haves” – Look buttercup, I know it’s great to have nice things around the office, but when you’re a small business you need to focus on being frugal. I remember back in the dot-com boom days, when one company I was doing a business development deal with bragged that they placed a large order for $1,000 Herman Miller chairs. I thought that wasn’t something to brag about, and I was right. They went out of business less than a year later. Amazon, on the other hand, became legendarily frugal with with their “door desks.” Whose example do you want to follow? Make sure you use your limited capital in the proper places, where it makes you money. You always want to spend your money in places that will give you a return.
Not Completely Understanding the Market – If you’re entering a new market, you can expect your business to go through a learning curve, but you gotta make it quick. You should learn everything about your customers, their needs, desires, demographics, how they engage with your product, how they found your product, what they tell their friends—you need to discover everything you can in the greatest detail possible. Your goal is to perfectly fit your product within a specific market. The best way to do this is to track and continually monitor every metric you can about your product and/or service. You need to conduct user tests, iterate your product, make new assumptions, and test some more. Expect the first version of your product to be a little embarrassing. In fact if it’s not, you probably launched too late. It gets better as you continue to improve it. Don’t get attached to anything. Be willing to change your product based on your metrics and data. If you don’t understand your market, you aren’t ready to scale your business.
Pricing Your Product Incorrectly – An amazing new lunch place has opened down the street from our office. I love eating there at least once a week, but I know they’ll be closed soon. I have to enjoy it while I can. I can tell that their food costs are way too high compared to their pricing. They are also priced a few dollars lower than anything else in the neighborhood.
Pricing your product incorrectly in the market can be the kiss of death for a business. You need to understand what your competitors are charging for your product, what’s your real markup, your costs, the overall economy, your sales strategy, etc. Coming up with a correct market price can be difficult, and you need to do a lot of research to get it right. At HealthJoy, we’ve done a lot of testing on price and settled on our $9.99 a month price for our launch. We’ve sat in meetings with potential customers, and they’ve told us that they’re shocked that they get that much service for such a low price. The trick is always to add the maximum value based on a given price point. Things like our A.I., JOY, allows us to drive more service than is normally possible at our price point.
Not Understanding Your Marketing Spend – Behind employee salary, marketing can be your biggest company expense when you’re trying to grow. According to a Gartner CMO survey, marketing expense budgets averaged 10.2% of revenue, but for some companies in high-growth stages, it can be much higher. In 2014, Salesforce invested 53% of its revenue into marketing and sales— that’s almost $2 billion dollars. Now, even if you’re only spending 5% of revenue on marketing, you need to have tight control on where your money is going. Ideally, you should, at a minimum, break even on every dollar you spend on marketing. You should also track your spend every way possible: online analytics, unique coupon codes, unique numbers, click-to-call tracking, etc. Marketing should be the engine for your company that you’re constantly tuning and improving by testing new concepts, creatives, media buys, etc.
John Wanamaker, a marketing pioneer, famously said, “Half the money I spend on advertising is wasted; the trouble is I don’t know which half.” These days, where you can spend a huge part of your budget and track every click, call, and sale, you shouldn’t be so lax.
Avoiding these 6 pitfalls isn’t hard; it just takes diligence and planning. Money should be viewed as a tool to turn your vision into a reality. You should always respect your money and the money of your investors to an even greater degree. Track everything, automate as much as possible, and be as frugal as you can.