Pitfalls to Avoid When Running Your Own Business!
Have you ever wondered why some entrepreneurs succeed where others fail?
This article considers two entrepreneurs who operate in the same industry in the same economic environment. Contrasting the way each one approaches business, you will discover how the decisions each one makes can either lead to inevitable failure or considerable success by highlighting the potential impact of the different choices each entrepreneur makes.
Which one, if either of these, are you?
Both entrepreneurs have a business providing the same product, to the same target market (i.e. type of customer), operating in the same location, at similar price points, offering similar standards of service. The economic environment with all its challenges is the same for both businesses. To all intents and purposes, both appear to be following the same path (business operating model), and yet ...
... where one prospers, the other fails.
As an entrepreneur, you may have experienced a similar situation at some point in your own journey, possibly from both perspectives.
So, what decisions might you have taken that produced a different outcome from your competitor?
In this scenario, each entrepreneur has the same level of funding in their business. Even though they both serve the same number of customers and both receive the same trading revenue (sales income), only one runs out of money!
Why might this be the case and how might this happen?
Both entrepreneurs have the same level of funding. However, where one decides to use personal savings to fund the business, in contrast, the other borrows the money opting to take a loan.
So, how might the way you choose to fund your business potentially affect the outcome?
Whilst there are many ways to fund a business …
... most funding options require some form of repayment. In this scenario, the decision to take a loan means one entrepreneur will incur higher expenses because, as is often the case with a loan, interest charges incurred on the loan will also have to be repaid in addition to the loan repayments.
In contrast, the entrepreneur who uses personal savings doesn't have any interest charges to repay, nor any repayment schedule. Instead, savings invested in the business will suffer the lost opportunity of the interest that could otherwise have been earned had it stayed in the bank.
So, even though both funding options incur a cost initially, in this scenario the entrepreneur who funds the business with savings will ultimately have more money available to pay for business essentials enabling trading to continue for longer without needing more funding.
Whilst borrowing the money to start or fund your business may be unavoidable, it's worth considering how this will affect your cash flow (the amount of money coming in and going out at the same time). Will you have at least enough income to match your outgoings, or will your decision to borrow increase your outgoings too much?
How much will your decision adversely affect the financial sustainability of your business?
Depending on the urgency of the situation, it can be easy to forget to compare your income against your outgoings. It can also be easy to forget to set aside a contingency or reserve to take account of unforeseeable circumstances that may reduce or decimate your income, and/or significantly increase your outgoings.
In reality, in most cases, the term over which a loan must be repaid will differ from this example. Nevertheless, this scenario highlights potential pitfalls entrepreneurs face when borrowing money for business reasons. Whichever way you decide to fund your company from a growing number of available options, rest assured taking a loan will not automatically lead to business failure.
Provided you can afford to make the loan repayments when required ...
... other factors will also determine why one business succeeds where the other fails.
So, what might these other factors be?
Returning to the scenario, both entrepreneurs receive the same sales income (trading revenue). After deducting expenses from income to work out how much profit each one has made, both pay themselves a salary. Where one takes a sizeable amount out of the business to live on, the other takes a minimal amount reinvesting the majority of the profit back into the business. In this scenario, both entrepreneurs have made a profit and neither one has traded at a loss.
So… what's the issue?
As an entrepreneur yourself, you are probably aware of the need to raise funding to launch a business but, how aware are you of the need to fund working capital? How often do you remember to keep enough money in the business to meet ongoing operating expenses?
In the scenario under review, the entrepreneur who took a sizeable salary forgot to keep enough back to cover operating expenses and as a consequence quickly ran out of money. Without a capital injection, this business would not be able to continue trading and would have to close.
"Running out of money is a common reason businesses fail"
It may surprise you to know that a common reason businesses fail is running out of money. How meticulous are you at recording your outgoings? Are you fully aware of the upcoming expenses you need to pay for so that you know how much to keep aside, preferably for several months?
Of the entrepreneurs who do remember to fund working capital ...
... many inadvertently overlook the need to cover contingencies.
As you may know from bitter experience, unforeseen catastrophes can have a devastating impact on your business, especially when unexpected events occur that decimate your income! Have you ever considered how much you will need to cover your costs if you suddenly find yourself without any income? Will you be able to adapt quickly enough to replace any income you've lost?
Research suggests very few businesses keep enough cash in reserve to cover unforeseen events that often arise at inopportune moments. This can be especially hard for you as an entrepreneur if you aren't at the stage where you have recurring revenue streams yet.
No matter how bad it gets, the good news is, there are ...
... known, tried, tested, and proven ways to avoid these and other pitfalls!
Join Us and Empower Your Progress with Good Quality Business Advice from Bradley Brown Consulting
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