The economy has certainly had a big impact on many businesses over the last several months. But despite the ongoing uncertainties, people continue to launch new businesses.
That’s what I love most about entrepreneurs. It’s that sink or swim mentality. For some, it’s out of necessity having lost jobs. For others, it’s seeing an opportunity in the changing norms and needs during the crisis. Although new businesses are being started under unusual circumstances, they face the same challenges as any other new venture.
Most often, the problem isn’t the products or services. It’s not a lack of enthusiasm on the part of the owner. And, it’s not a lack of consumer need. Rather, it’s in the operations. There are five areas that I always talk about that can derail any potential business. It’s not complicated or difficult, but it is necessary to identify these issues and be proactive before they become a problem.
A Lack of Working Capital
Anybody can come up with a great idea. But taking that idea and breathing life into it requires a lot more than just a thought. All it takes to start a business is to offer something for sale. It’s really that simple. Set up a website. Put up an ad. Post it on IG or FB and let the chips fall where they may. All of this can be done with relatively short money. But, running that business, on the other hand, requires much more of a financial commitment than the owner plans on.
Purchasing inventory or hiring staff and even setting up vendors all require cash. I’ve seen companies get off to a good start but then sales don’t pick up as quickly as expected or there are unexpected costs and the business doesn’t have the funds to bridge the gap.
Here’s another example – a bank will set limits on payment processing for any new company based on expectations and collateral. If orders suddenly exceed those limits, there will be no way to process the payments.
The fix: Be realistic about the budget. Make projections based on everything going well, but add in contingencies in case they don’t. Be aware of the limits and stay within them until you have more financial backing.
Scaling too Quickly
Everybody’s goal in business is to grow. But growing too quickly can prove to be disastrous if you’re not prepared. A company doing well filling 10 orders a day will be scrambling if it’s suddenly faced with filling 100 orders a day. If it can’t keep up, there’s a risk of losing not only the new orders but also previously loyal customers.
It can happen when a company goes too hard on marketing without first making an accurate assessment of how much it can handle. And, it can happen when an overly eager owner isn’t good about saying no.
The fix: Be honest with yourself about what you can handle. Set up for bigger orders before you take them on or make arrangements to have others step in and help fill them. Don’t be afraid of saying no. It’s better to turn somebody down and keep a solid relationship than to disappoint.
Neglecting the numbers
Every business owner should know and track some very basic numbers to get a realistic picture of the company. Too often, the focus is on sales and revenue without taking into account costs and cash flow. Is the cost of the product too high? Are you spending too much or not enough on advertising? Will there be enough money in the bank to keep going after next month’s bills are paid?
There are plenty of unexpected events in business, but companies are most often thrown off the track by things they could have anticipated if they were paying attention.
The fix: Set up a dashboard with the numbers you want to keep an eye on to give you an accurate, up-to-date sense of what’s happening. Include revenue, costs, profits, and losses. Know your cash flow and your run rate.
Bad Vendor Relationships
Business is not a solitary game. No business can survive entirely on its own. You need vendors and partners. This includes those you buy products from, distributors who get the product into the hands of customers, payment processing solutions providers, advertising platforms, and more.
These other companies have a large impact on a business. If your product supplier sends out an inferior product, you will be dealing with angry customers. It will be the same if your distributor slows down or repeatedly delivers to the wrong addresses. Even when it’s not your fault, it will be your fault.
The fix: Carefully vet your vendors and partners. Don’t automatically choose the cheapest one or the one with the slickest website. Look for referrals. Check out their customer reviews. Look for companies with a proven track record.
Not Protecting the Merchant Account
Too often, business owners set up a merchant account and payment processing solution and then ignore them. But, there are many things that can go wrong and some simple ways to optimize this part of the business. It’s important to have systems to prevent fraud and manage chargebacks. Without these, a merchant can easily get taken by surprise with high charges.
It would be wonderful if all customers were honest, but they’re not. They may be buying with a stolen credit card or they may be buying from you as part of a scam. As an unsuspecting victim, you get hit with costs you couldn’t have anticipated and shouldn’t need to deal with it.
Chargebacks come when a customer appeals to their credit card company to reverse a payment. Merchants often don’t know until the credit card company takes back the money it put in their account. Customers may turn to their credit card company because they’re unsatisfied with your product or service, they forgot or didn’t realize why there is a charge on their card, or they’re intentionally being dishonest. It doesn’t matter when you’re left without cash or worse, a canceled account because of having too many chargebacks.
The fix: Take some time on a regular basis to review your payment processing solutions. Check on the fees and the rates. Have they gone up? Could you do better? Is your payment processing partner available if you need help?
Set up fraud protection and chargeback management when you set up your payment processing solution. This should be included in the services from your payment processing solutions provider.
Also, be aware of the reasons for chargebacks and set up systems to prevent them. Encourage customers to come directly to you if there is a problem. Make your refund policy clear. Follow up with customers so they know what to look for on their bill and can reach you easily if there is a problem.
There is no guarantee in business, but there are some simple steps you can take to increase your chance of success. The key is to be aware of the potential pitfalls and plan around them.