It’s the start of a new year which means that many small businesses and aspiring entrepreneurs will have big plans for where they will be this time next year. Setting up and growing a small business probably falls under the category of ‘lifestyle choice’ rather than ‘job’. So if you want to get the most out of your blood, sweat and tears and minimize your risks then these three pitfalls of bad advice for small businesses need to be avoided.
1. Hire people you know
There is a perception that hiring a ‘known quantity’ is a safe bet when adding to your team. This is definitely true, if that quantity is known to be exceptional at the job that they do. Otherwise, taking friends, colleagues or even family members on board for your small business adventure can be a recipe for disaster.
Firstly, a position should be filled by the best person for the role. This is even more crucial if the team running your business is a small one where the individual contributions of each member are invaluable to the operation.
Secondly, if things simply just aren’t working out with an employee it’s time for a change. The sooner this happens the better, as it could be crippling the returns you’re getting for that blood. If you’re friends or even family with that employee they will probably be kept around longer than they should, if they are even let go at all. Don’t put yourself in a position to impede your growth and your personal relationships. After all there are more important things in life than business…..
2. You don’t have to be cheaper
New and small businesses alike feel that they have to be cheaper than the big boys in order to win business and establish a share of their market. A small bakery may feel like it has to charge half the price of the big bad corporate supermarkets in order to generate business for its scrumptious cupcakes. The cupcakes could be walking out the door, not only for their fantastic taste but because they are so cheap! However, your nice local bakery could be losing money with each sale. Imagine that, losing money when you sell things, surely it’s supposed to be the opposite. If you are selling at a cheap price then you need to make sure your price margins are correct. Your price margin will make sure you are making a profit on every sale, right down to every single expense and overhead that needs to be covered, like accounting software (ahem…). Always use price margins rather than price mark-ups and if you don’t fully understand margins then you need to hold off launching your business until you do. If you have a business, you need to go and find out what they are, this minute.
Furthermore, well balanced businesses have lower customer acquisition costs than returns from those customers. To get to grips with your customer acquisition cost you would take your entire cost of sales and marketing over a given period, including salaries and other headcount related expenses, and divide it by the number of customers that you acquired in that period. This should be less than the lifetime value of that customer (LTV) which is the gross margin you will make from throughout their relationship with your cupcakes.
If these numbers show that you can’t afford to be that much cheaper than those supermarkets that produce soulless cupcakes than you need to change your strategy before you sell yourself out of business. If you’re a local bakery you could be doing personalised icings or offering customers the chance to submit their own recipes rather than throwing money down the drain. If you can do both then I’ll take a dozen.
3. If you want it done right do it yourself
The most valuable asset entrepreneurs and owners have is time. At the end of the day they are responsible for every aspect of their business. It can mean endless meetings, tax returns and dealing with disgruntled customers and that’s just the beginning. So it’s probably not wise to get bogged down in the mopping of the floors or the flipping of the burgers. Delegation is a popular course of action for a reason. It means you will find it hard to miss deadlines and all the time you put into hiring the right person for the job (tip #1) won’t be wasted. Who knows, the employee you delegate to might actually feel valued when they get to do more than flip burgers. And if you feel like you need to do the flipping because the person you hired can’t flip burgers then I have one question…did you hire your friend?
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