COSTLY MISTAKES BY A BUSINESS OWNER

Starting a business without a Business Plan including financial projections.

Inadequate financing, too much debt.

Wind up a business when it could be sold.

Pay too much for an existing business, due diligence and evaluation of asking price are a must.

Not having backups of business computer data and programs.

Not obtaining a patent etc. for a new product.

​Sell a business without an asking price evaluation, possibly not asking enough.

Employee Productivity: Often one of the largest expenses a business has. Too many employees for the workload, excessive paid downtime and overtime. Employees are spending time on unproductive tasks.

In some situations, productivity can be improved with Artificial Intelligence. (AI)

Poor scheduling and inefficient work processes.

Solution: Improve scheduling, productivity, and revenue generated per employee.

Incorrect pricing and low profit margins: A business can have plenty of customers and still make very little money. Prices have not kept up with rising costs including inflation. Jobs are quoted too cheaply. Discounts are given without considering profitability. The owner does not know the true cost of delivering a product or service.

Solution: Calculate the actual gross profit margin on every major product, service, or job.

Inventory, materials and purchasing: Particularly important for retailers, restaurants, manufacturers and contractors. Overstocking and obsolete inventory. Theft, spoilage, damage and material waste. Buying from suppliers at uncompetitive prices. Poor control over materials used on jobs.

Solution: Better purchasing controls, inventory tracking and supplier negotiations.

Overhead and operating expenses: possibly paying too much for rent, utilities and storage, software subscriptions and telephone plans, insurance premiums and financing costs, unnecessary vehicles, equipment and services.

Solution: Conduct a line-by-line review of expenses and determine if savings can be obtained.

Inadequate accounts receivable and cash collection: Work is completed, but the money is not collected promptly, late invoices, customers paying well beyond agreed terms, bad debts and disputed invoices, failure to follow up on outstanding balances.

Solution: Invoice immediately, follow up consistently and establish clear credit policies.

Inefficient business processes: Rework and wasted time increase expenses, repeating tasks because of errors, poor communication between employees, excessive paperwork and manual data entry, delays, missed appointments and poorly organized jobs.

Solution: Standardize procedures, automate repetitive tasks and measure rework.

Vehicles, equipment and maintenance: A major area for construction, transportation, trades and field-service businesses, excessive fuel consumption, equipment sitting idle, poor preventative maintenance, unnecessary vehicle leases or financing, unprofitable equipment utilization.

Solution: measure the total cost and revenue generated by each vehicle or major asset.

Ineffective marketing and sales: Businesses can spend heavily to attract customers without earning a worthwhile return, advertising channels that do not generate profitable sales, poor follow-up on leads, high customer acquisition costs, losing existing customers through poor service.

Solution: Track marketing cost per customer and profit per customer, not just sales volume.

Poor financial management and lack of cost control: Owner may not realize which parts of their business are losing money by; not reviewing monthly financial statements, failing to compare actual results with budgets, not knowing profitability by product, customer or job.

Solution: Introduce management reporting and profitability analysis utilizing financial ratio’s, comparison to industry benchmarks, etc.

Incorrect Decision making and poor utilization of time by owner:

The difference between a successful and unsuccessful business is the business owner

making correct decisions. The business owner must set daily/weekly priorities and short term and long-term goals. Sometimes a business may have to pivot their focus to remain viable and profitable. The owner spends too much time on low-value work.

Solution: For significant decisions the owner should consult with a professional advisor.

Low-value work should be delegated.

Article written by John Costen, CPA