Poor planning and money management has been the cause of more business failures than any other issues, and it’s no wonder. We aren’t born knowing how to manage money. Most of us aren’t taught at home or in school how to handle it either. Instead, we figure it out along the way through trial and error. Those same bad habits and mistaken ideas about money that cause problems in our personal finances can plague our businesses as well if we’re not careful. Here are 3 business money mistakes that keep you from success.
Mistake 1: Too Much Penny Pinching and Being Underfunded
Here’s the key: Spending too little is just as bad for business as spending too much. Many business startups are undercapitalized. Without doing the research and proper planning, new business owners may not take into account the cost leasing of brick and mortar space, build-out, utilities, and hiring employees.
It’s good to be frugal, but when you’re constantly on the lookout for free and low-cost tools or working 70-hour weeks because you “can’t afford to outsource,” you’re not doing your business any favors. You may be bootstrapping and working really hard to make something from nothing, but what you’re really doing is digging a rut that will be nearly impossible to climb out of. Additionally, you’re reinforcing a poverty mindset that will continue to plague you for years if you let it.
Rather than pinching pennies, learn to spend money strategically. Buy what you need, when you need it. For example, you don’t need to buy the flashing neon sign or extra square footage right at the get-go. Start simple and build up and out as profits begin to come in. Invest in top-quality products and programs rather than settling for low-ticket, inadequate plans. Just as quality clothes, furniture, and cars work better and last longer, quality services, products, and software will serve both you and your clients better. And unlike that car with its depreciation and wear and tear, good quality business tools will pay for themselves.
Mistake 2: Shiny Object Syndrome
Some things are just hard to resist—especially when your friends or business colleagues are all jumping on board. New tools, training, group coaching programs, and even business models can all have a strong pull, and if you aren’t careful, these shiny objects can quickly distract you from your current goals. If you’ve started with a solid business plan that’s working, why rock the boat? Consider your personality and habits. Are you the prudent type who thinks things through before acting or are you the kind of person who leaps before looking or gets excited by every new promotion or product that comes long?
If you find yourself exhibiting shiny object syndrome frequently, try this two-step plan instead:
- For “too good to refuse” offers, make a plan for achieving a positive return on investment (ROI) before you purchase. If you cannot find a realistic way to make the purchase pay for itself, don’t buy it.
- For attractive new business ideas, create a “someday list.” Jot down your idea and a basic outline for implementation, then get back to the task at hand. This way that great idea won’t be lost, but it also won’t join the ranks of half-finished business plans that dominate struggling (or unsuccessful) businesses.
Falling for the Sunk Costs Fallacy
If you’ve ever said to yourself, “I know I’m not using this subscription, but it cost too much to give it up. I’m still paying the introductory price and now it’s much more expensive,” then you’ve fallen for the sunk costs fallacy[1].
This common mistake is well-known among economists, and we all fall victim to it from time to time. Simply put, the sunk costs fallacy is what makes us justify investing more money or time into something—even though we’re not seeing results—because we’ve already spent so much. It’s what encourages us to repair the car one more time (after all, we just put new tires on it), eat a meal we don’t enjoy (simply because we’ve paid for it), and yes, continue to pay for tools, training, and resources we’re not using.
Take a few minutes and examine your current business expenses. What are you paying for month after month that you’re not using? Either make a plan to put them to work for you or cancel them. Stop falling for the sunk costs fallacy.
Although the track record for new businesses[2] remaining in business past the 5-year mark is relatively small, that doesn’t automatically mean you are doomed from the start. You can avoid these deleterious business money mistakes. Solid planning, wise money management, and strategic investment of your capital will lay a good foundation.
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[1] Ducharme, J. (2018). The sunk cost fallacy is ruining your decisions. Here’s How. Time. Retrieved from https://time.com/5347133/sunk-cost-fallacy-decisions/
[2] Polevoi, L. (2012). 8 reasons why small businesses fail. Intuit Quickbooks. Retrieved from https://quickbooks.intuit.com/r/money/8-reasons-why-small-businesses-fail/