5 Costly Mistakes to Avoid When Starting a Business in 2009!

If you want to start a business, it’s imperative to safeguard it against failure. If you know the mistakes to avoid before you start your company, you’ll increase your odds for success.

Many business owners are so enthusiastic to get started that they fail to understand the risks involved when starting a business. Although a high percentage of new businesses fail within the first three to five years, you can be one of the fortunate ones and beat the odds.

Here are 5 costly mistakes to avoid when starting a new business in 2009:

1. Forming a sole proprietorship. It may seem like the easiest and quickest route to take, but you’ll put yourself at risk if you don’t separate your personal finances from your business. Form a separate business entity like a corporation or LLC, even if you work from home. The biggest mistake that entrepreneurs make is leaving their personal assets vulnerable to business liens, lawsuits, and creditors. Keep your business separate from your personal accounts, and you’ll sleep better knowing that in the worst case scenario, all your personal assets are safe. Plus your risk of an IRS audit increases when you file a Schedule C!

2. Using personal credit to finance a business. Never use personal credit cards to finance your business ventures. Starting from day one, keep all personal and business finances separate. It will be easier for bookkeeping purposes, and you’ll keep your personal line of credit safe. The key is to keep your personal revolving debt low and to use a business credit card in the name of the LLC or corporation. Yes, the debt will be personal guaranteed. However, being under the EIN of the LLC or corporation, it will not show up on your personal credit report! This will help your personal credit score also.

3. Maxing out credit cards. Here’s the problem. If you spend like crazy using your personal credit cards, it will negatively affect your revolving debt ratio. This will have a negative impact on your ability to obtain a business line of credit. Even though business and personal lines of credit are separate, the bank will consider your personal credit rating when determining your eligibility for a loan. If you max out your cards, the bank assumes that you have a negative cash flow. The other problem is when you apply for a business credit card in the name of the LLC or corporation. 95% of the formula by the bank to determine if and how much to give credit to your brand new LLC or corporation is based upon your personal credit score and revolving debt ratio. If your revolving debt is above 40% or higher (5-20% is ideal) you may get rejected for any business credit card! Keep balances on credit cards low, and you’ll be more likely to get credit when you need it.

4. Applying for business credit when strapped for cash. The time to establish a business line of credit is before you’re out of money. Lenders want the assurance that you can pay credit card balances and loans. If you’re strapped for cash, you’re living beyond your means. If the company vehicle breaks down or you have an unexpected business expense, you may get behind on payments. Establish your line of credit when the cash flow is positive and you’ll have a soft place to fall when and if you need to use credit.

5. Failing to plan. Before the world becomes your customer, keep in mind that you need more than a wing and a prayer to succeed. The first step is to stop operating your business as a sole proprietorship and incorporate or form an LLC immediately! Next, obtain a business credit card in the name of the LLC or corporation and stop using your personal credit cards for your business. In about six month, your LLC or corporation may be in a position to obtain a business line of credit, a business loan or perhaps a merchant account cash advance (the last one is the hottest form of lending to businesses today, but the least understood). Plan ahead, build that foundation and your business will keep standing when the unexpected expenses arise.

Start with a plan, do your research, and you can avoid the 5 costly mistakes that sink most new businesses. It’s a new year. Make 2009 a prosperous and profitable one.

Got Business Acumen? What is It? Why Do I Need it and How Do I Get It?

I heard a great talk a few years ago from one of the highest ranking executives at a major company. She advised the audience to think of the three words or phrases that you would want people to use to describe you when you are not in the room. Why when you are “not in the room?” In her view, many of the most significant decisions that impact your career will be made by others when you are not in the room. Whether you get promoted or not, or win the business or not – these decisions happen behind closed doors after you leave. She then advised the audience to think of the three words that people actually use to describe you when you are not in the room. 

So while you are thinking of your list, I’d like to suggest that one of the critical phrases that you need is “business acumen”.   Business acumen represents a person’s knowledge and ability to make profitable business decisions.  Do you have business acumen? More importantly, do others perceive that you have it? Do people respect your knowledge and ability to make business decisions?

Business acumen is critical to your career development in any industry you choose, in every function, and at every level of leadership.   If you look at surveys of what CEOs want from their CFOs, CIOs, or leader of sales, marketing, operations, or human resources, they want “business partners.”  I recently spoke with one CEO who says that his biggest talent challenge is finding people who have “functional expertise with general management perspective” – in other words, people with a strong understanding of your business.  When customers are surveyed about what they want from the supplier sales people who call on them, they want “sales people who understand my business.”  When you read press releases that announce executive promotions, they frequently state that the person hired “has the business acumen to lead our company” going forward.  

Developing your business acumen will create opportunities for you, while the lack of it may hold you back. So how do we develop it? To make sure we focus our efforts effectively, let’s start with the definition of business acumen -a person’s knowledge and ability to make profitable business decisions – and break it down into the components of knowledge and ability.

Knowledge involves an understanding of how businesses work. This knowledge encompasses understanding of customers, competitors, technology, and regulatory issues that is then translated into a profitable course of action. Applying this knowledge requires both analytical and creative capacity. Analytical skill involves evaluating alternative scenarios to determine the attractiveness and viability of different options. Creativity, applied to business issues, involves developing new options and possibilities for the future. This scope of knowledge is a necessary component of business acumen. 

Ability to make decisions is the second key component. Ability to make decisions involves two elements: capacity at the individual level to make decisions and a leadership ability to engage others in decisions and their execution.  

Let me illustrate these distinctions with an example of why both elements are important. Let’s suppose you are deciding whether to sell shares of a stock that you own. You first apply your knowledge to evaluate the stock. You apply your decision-making ability to sell the stock. When you click your mouse on your online brokerage account, your trade is executed.  This example does require personal decision capacity, but requires zero capacity to engage others in the decision and its execution. You decide, you execute, and it is done.  

Now consider business decisions like entering a new market, acquiring a competitor, bidding on a major new customer account, developing a new product, implementing a new IT system, or establishing a joint venture. Engaging others in decision-making and execution is a central piece of the puzzle. As a leader, making a good business decision involves an assessment of your organization’s ability to execute it. If you decide to move forward but your organization is unable or unwilling to execute that decision, then how good was the decision in the first place?

This capacity for group decision making and execution requires both group process knowledge and emotional intelligence. The end result is a decision that involves other people and depends on them for execution.    If you proceed blindly without this input, you will make poor decisions and get poor execution. 

So part of business acumen involves group dynamics.   It also involves you and your personal need for approval. If you can’t help a group make and execute a decision because you need their approval, you will fail. They may like you, they may or may not respect you, and you are unlikely to make and execute good decisions. 

If you are committed to developing your business acumen, then I suggest you focus on three areas: building your business knowledge, increasing your self-awareness and capacity to make decisions, and increasing your ability to engage other people in a decision-making and execution process.   When it comes time for your next career move and you are not in the room, your increased business acumen will be a huge advantage for you.

Baby Boomer Entrepreneurs – You Can’t Build Your Business on Common Sense

Baby Boomer Entrepreneurs have serious intentions of building businesses that will support and fund their desired lifestyles rather than opting for the traditional path of retirement. Yet, many of the entrepreneurs are depending upon common sense as the foundation upon which to build. Business success is not built on common sense; it is built upon understanding the common problem.

Grasping the Common Problem

As an entrepreneur, you face the challenge of establishing a complex business with limited resources and limited time. You have very little room for big mistakes. Because the challenge is bigger than what you can do by yourself, you have to involve others: employees, independent contractors, investors, and possibly even partners. And of course, your ultimate success is based upon how you are received by customers.

As a professional entrepreneur, it is your job to set the expectations for the business, for all aspects of the business, for everyone associated with your business. People often refer to this as having the entrepreneurial mindset, being willing to accept responsibility for what you are creating.

You determine what level of service you want to promise to your customers. You establish the standards for the boundaries that you will not cross. You do this because the customer is not always right.

You establish how your employees will perform within your company. You will define exactly how they are to take steps to meet or exceed the expectations that your customers can reasonably have about how your business will perform. You base this upon the promises you have made to your customers. This is frequently called the business plan.

Your business plan is far more importantly your tool for designing and operating your business than being a tool to raise money. Writing your plan does not have to be as complex and time consuming as most people expect that it must be to produce results. One very good resource comes from Jim Horan, a skilled writer dispensing advice to entrepreneurs and author of The One Page Business Plan: The Fastest, Easiest Way to Write a Business Plan.

Everyone has an opinion, an expectation. And when our expectations are not realized, the result is dissatisfaction and anger. Not only is that true for you, it is also true for your employees and customers. You want a clear definition of what can be expected of your business. Build your business on a business plan.

It is in accepting the responsibility for creating your expectations for your business and seeing that they are properly aligned with the expectations of your customers and employees that you avoid the trap of depending upon common sense. It is in defining and aligning expectations that you differentiate your business in the marketplace. This is what makes you stand out from the commodity businesses.

The overwhelming majority of business owners either fail to establish expectations or to communicate the expectations they hold locked in their minds. They think that common sense should tell people what to expect. They fail to establish specific systems that explain to customers how they will be served. They fail to establish systems and procedures that employees follow to make sure that customers get exactly what was promised to them.

What people so often fail to understand is there is no such thing as common sense. What we so often call common sense is actually an agreement or alignment of our expectations that results from dialog over time. By establishing the expectations on how you will serve the market, what promises you will make to your customers and how you will keep those promises, you make your business stand out from the many that lack direction and only do the same thing twice in a row by accident. That is how customers develop the common sense to come to you rather than other sources in the market, you are consistent in meeting your promises. Customers can feel in control because if what you promised is exactly what they want, they know exactly where to go to get what they want. They come to you.

But the process does not begin with customers. You must establish expectations for your employees. These are expectations of what you will do for your employees and what your employees will do for you to serve your customers. This must be done before you make the promises to customers. By teaching your employees exactly how to follow through upon your promises that you will make to customers, your business creates customer service experiences that WOW your market. Don’t depend upon common sense to make this happen.

The vast majority of budding Baby Boomer Entrepreneurs are making the transition from being employees to owners. If this is true for you, you have probably been accountable for serving either internal or external customers. And most likely, you have been frustrated with the lack of precision from your boss in helping you to be clear about how to serve customers. It is quite probable that frustration and the desire to do it right is exactly the reason you want to make the change to becoming the boss. The difference now is that you must step up and be the source of these decisions, not the implementer of someone else’s vision and decisions. For employees to implement your decisions and vision, you must paint your goals with the detail of specific steps to be taken, not the fuzzy generality so often presented. Avoid becoming exactly like the boss who frustrated you.

Don’t Assume

Don’t assume that anyone can read your mind and know your vision.

Don’t assume that every customer knows what you are promising to the market, why you are making that promise, and how you are going to fulfill that promise.

Don’t assume every customer recognizes the value of what you provide or that they will appreciate it and will be willing to pay for it just because you provided it.

Don’t assume that because people work for you they are committed to or even care about your dream.

Don’t assume that just because it is your vision, you can repeat it every time exactly the same way to make it consistent without writing it down.

Don’t assume every employee knows that brushing their teeth, taking a bath, and putting on clean clothes before coming to work are critical steps in customer service.

Don’t assume you can build a business and serve your customers all by yourself.

Don’t assume your serious intentions are automatically built into your business. Take specific calculated steps to: 1) create the vision; 2) document your vision; and 3) find a way to express it to others so they can join you in delivering on your promises. Delivering on your promises cannot depend upon everyone having common sense. Build your business on the solid foundation that everyone, customer and employee alike, can expect that you will deliver on your promises.