Worst Small Business Mistakes

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Committing these Worst Small Business Mistakes can make you fail. Business failure is a fact of life. But it doesn’t have to be a fact of your life.

Let’s identify the worst small business mistakes that often lie at the root of a small business failure. Forbes says the failure rate for small business is eight out of ten. Other studies reviewed recently in the Washington Post suggest six out of ten will fail. Either way, the mortality rate for small business is a terrible fact of life. But it does not have to be a fact of your life.  Everyone makes mistakes. But you can easily avoid the worst small business mistakes that are often fatal to a business.

If you are making any of these mistakes, you are asking for trouble. I’ve been a bankruptcy lawyer for 34 years. During that time I have doctored hundreds of sick businesses. Some could be turned around and saved. Most were too far gone for anyone to make a difference.

worst small business mistakesTake the gamble out of opening a business. The worst small business mistakes leading to small business failures are discussed below.

 

Bad bookkeeping leads to small business failure.

Sloppy, inadequate, or nonexistent bookkeeping will destroy your small business. You won’t know if you are making money, or losing money. Your business may have a great cash flow, and still lose money. Good cash flow does not always means profits. For example, the cash flow may come from selling down inventory. Or under-pricing  inventory. At the same time, you may be propping up cash flow by tapping into credit lines.

You can easily miss all the the damage you are causing if you don’t do a monthly Profit and Loss statement.  Without good bookkeeping, you won’t know your real cost of doing business. You won’t be able to make intelligent decisions on how to price your goods and services. You might be taking home money that should stay in your business for inventory replacement. You won’t be able to make adequate provision for tax payments.

Are you one of those who always files an extension at tax time? There is no good reason for needing an extension to file your taxes. But there are bad reasons. Such as sloppy books. Many business owners file under an extension because they think it gives them more time to pay. Wrong. You will pay penalties and interest when you file under an extension unless you have already prepaid what you owe. Some states, like California, will charge you a penalty for late filing even if you don’t owe any money. Bad bookkeeping is also the gateway that leads to a host of other Worst Small Business Mistakes.

Non productive family members on payroll are worse than locusts.

worst small business mistakesI mean that, literally. Locusts do their damage and move on to destroy the next farm. Nonproductive family members on a payroll stay forever, because you let them. I have seen many cases where a small business owner loses everything. I mean  your house, your business and your family. All from having non productive family members on the payroll. Usually, it’s your adult children. Are you one of those whose dream is to create a family business?

There’s nothing wrong with being generous to the members of your family. But when you employ a marginally qualified family member, you are taking a job away from someone else who would be a real asset to your business. Instead, you are filling a position with someone who is a liability to your business.

Unqualified family employees cause other problems as well. They may cause social disruptions in your workplace. Other employees are easily alienated when they see undeserved perks go to your family members. Morale drops. You probably tolerate poor job performance from family members that you would not accept from a stranger. When poor job performance of family members hits you square in the face, you probably ignore it and treat the bad job they do as if it isn’t happening. That will quickly alienate your key employees.

Key employees will see they are undercompensated relative to poorly performing family members. A key employee may have been satisfied with her compensation. But when she sees your overpaid son or daughter earning the same as she does, you’re in trouble. Your best workers will leave. Be generous with the people you love. But do it with the money you earn after you bring it home.

You are not solving a family problem by putting an incompetent or unemployable family member on the premises of your business.

Overcompensation of the business owner.

worst small business mistakesSome business owners treat their business like a piggy bank. They feel entitled to take out money whenever they feel like going to Vegas or buying a new toy. That’s fine when all your bills are paid. But leaving bills unpaid when you take a draw is bad medicine. A good business that has gone bad is often the result of the owner getting paid too much. If so, you are depriving your business of the money it needs to stay in business. How is this possible?

Time and again the source of small business failure is over-extension of credit. A small business owner can unwittingly run up credit lines and credit cards to compensate for the cash drain of the owner’s overcompensation.  The use of money borrowed on revolving debt let’s you have a paycheck but is is deadly poison to your business.  Those who do it don’t even see the train wreck coming. That’s because the owner stays current on the revolving debt with minimum monthly payments. You think you are in control of your debt. Instead, your debt is in control of you.

This naturally ties in with the failure to have good bookkeeping practices. You have got to pay attention to Profit and Loss statements. Especially when your business is running on revolving debt. Your debt balances will creep up, month by month. Eventually you will run out of available credit. Another problem with overcompensation of a business owner is that you may cause you to be under-compensating key employees. You may actually have some employees who are more valuable, or just as valuable, as you are. The long term health of your business will be effected. Ignore adequate compensation of key employees, and ignore your bills (in favor of yourself), at your peril.

Dedication. This article is dedicated to Mr. Frank Schiller of Los Angeles. Frank is a retired businessman, and has been a volunteer mentor at SCORE for 25 years. Score is a unique resource for small business owners. It is operated by the Small Business Administration.  SCORE Los Angeles has been helping start-ups and small business owners since 1964. SCORE L.A. provides workshops, and one on one mentoring to help clients overcome business problems. 

Spotlight: Understand the worst small business mistakes that make 8 out of 10 businesses fail. Bad bookkeeping. Family members sapping payroll. Overcompensation for the owner.
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Leon Bayer and Jeffrey Wishman are Los Angeles Bankruptcy attorneys. They have been practicing bankruptcy lawyers in Los Angeles for 37 years and are Certified Bankruptcy Specialists by the State Bar of California. These are lawyers who bring experience, skill and creativity to the highly complex area of bankruptcy law. At this Los Angeles law firm, the your initial consultation with an expert is free. Mr. Bayer is a coauthor of Nolo's The New Bankruptcy: Will It Work for You?, authors the “Ask Leon” series on Nolo’s Bankruptcy, Debt & Foreclosure blog, and writes on bankruptcy topics for Nolo’s website. In addition, Mr. Bayer devotes a significant number of hours to volunteer legal services. The State Bar of California has commended Mr. Bayer for this work every year since 2004.