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Posted by A. B. Dada on March 7th, 2006
I see so many adults ruin their lives over failed business ventures, usually over a few simple rules that hold true time and again. I myself have ruined years of investment by breaking some of these rules, and I can only hope that a little thought and a lot of warning can give some younger readers here the chance to prevent the same mistakes.
When you become an entrepreneur, you take on total responsibility for the business you’re entering. Employees of a business take on a little responsibility, but the owner of the business takes it all on. The risk of losing everything is the reason why there is also a great reward in self-ownership.
Yet often in business we think we can pass on some of the risk to others, while still reaping the whole reward. It is very easy to find others to pass risk on to, but sharing the risk means sharing the rewards: usually you’ll share more of the reward than you want to.
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The biggest common mistake I see in businesses is in the integration of third parties into the business ownership. We think we can’t handle the business entirely ourselves, so we bring on friends or family into the business to balance the work load. In almost every situation I’ve come across, these partnerships are predestined to fail. When you consider the work you’re sharing, you have to consider the amount of work you’ll have to do to keep the partnership relationship working, and the amount of work you’ll have to do to jockey for the better rewards. I’ve seen husbands and wives battle because of running a business together and one person blaming the other for doing less work or taking more profit.
One of my most successful businesses is a corporation run by two partners, and it has had its own share of ups and downs. Even though the business is profitable and stable, I know that the friendship that I had with my business partner is not what it was 10 years ago. I think we also both agree that we’d have done better as competitors who worked together rather than partners.
Why did I bring on a partner? I figured I’d be able to handle a bigger customer base in the long run. While this was true, I also had to continue to pay out half of the business earnings when work was slow. Looking back, I believe the best solution would have been slower initial growth of the company that eventually led to bringing on employees or contractors to handle the overflow. I don’t regret forming a corporate partnership, but I’ve been lucky that we’ve lasted nearly a decade versus the quick corporate death that most partnerships face.
Another big problem that many new and seasoned entrepreneurs face is sharing the financial risk with others — usually banks, credit card companies, or friends and family. There are times when your cash flow is short of what you need, and it seems easy to just call the bank and get a short term loan, or charge your shortfall to your credit card. Even worse, we sometimes turn to family to borrow the money just until the next customer pays. From my experience, every one of these can be detrimental — I’ve found that the businesses best suited to bank loans and credit lines are those who don’t need them to survive.
Cash flow is the most important need to keep a business afloat, short of you being responsible for your job. I can not count how many businesses I lost because of bad cash flow management — and I can tell you honestly that all my successes were due to having a little extra cash in the bank to cover the unknown. My best advice to the new business owner is to take your first 3 paychecks from the business and sock them away. Having 3 months overhead covered in the bank is even better, and my friends with the most successful business all have over a year of cash available without going to the loan officer or calling up a family member.
Asking a family member for a loan is an absolute deathtrap to businesses. We humans seem to feel that we don’t need to hold ourselves to the same accountability with family as we would with a bank. If you need to ask a family member for money because you can’t get a loan or get a credit line, you’re in deeper trouble than you realize and the loan will likely go unpaid when the business collapses. As I said earlier, the people who need money the least are the ones who can get loans the easiest — banks know who the worst risks are.
If you find yourself in a cash flow challenge, the best thing you can do is to be honest with your customers and make temporary cut backs to overcome the shortfall. I had to cancel a huge project before it began because of a budget problem, but the customer was happy that I was honest, and they hired me again in the future for another project. In another situation I lost one of my top customers because of a budget shortfall that I tried to overcome by robbing Peter to pay Paul, and I still feel guilt over losing that customer almost 12 years ago.
The last warning I need to share returns to the family and friends issue. My father told me that you shouldn’t make businesses with friends, but you should make friends in business. This is so true, and carries on to family as well. I see successful family businesses often, but we rarely see the ones that fail — these greatly outnumber the successes. And when a business fails, it is normal for those involved in the business to part ways. Losing a friend or breaking up a family is not worth the risk of profit. If you want to involve friends or family in your business, bring them on as employees, or consider working with them contractually as suppliers or third party providers. A little nepotism hurt no one when one can cut off any leeches. When the leech is your partner, though, it can change your life for the worse if problems occur.
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