So you have — or want to have — your own small business.
Being your own boss and having to deal with a diverse customer base is both challenging and fun.
I started my web design business 12 years ago, while also keeping a job at the local radio station.
Then, in 2009, I became a full-time business woman.
Since then, I’ve met a lot of great designers in my city and seen how amazingly well their businesses grew. And then some of them went out of business.
When the last recession really hit us, many of these cool design studios went bankrupt. So I worked to understand what went wrong for them, and it all made sense. Here are five of their biggest mistakes, which can bankrupt your small business, as well.
Getting a dandy downtown office
Many small businesses can be easily run from, well … home. And yet some rush to get a cool office in the city, just so that they look like “real businessmen.” The only problem is that doing so immediately increases your overhead, while the business is still not mature enough to keep running even during some rough times.
I’ve always done my web design work from home or various vacation places. This allows me to keep costs down and get through the occasional tough times.
My clients don’t care if I work from the Hilton hotel or a shack in the mountains. As long as I deliver solid work, they’re thrilled.
Rushing to hire staff
Another small business mistake is to hire full-time employees too early, rather than using freelancers for one-time projects or other workload assistance. If there’s not enough work to keep a full-time employee busy, then hiring a good reliable freelancer avoids the added costs that come with paying a full-time salary and benefits.
Of course, I’m not advising anyone to hinder their company’s growth by not hiring when it’s important, but I’ve seen too many small businesses nosedive with extra people on the payroll, even though their services weren’t needed.
Not saving money when business is booming
As the last recession spread, people lost their jobs, companies went bankrupt, and clients stopped buying.
When the tide turned for the worst, overspending on fancy offices and other frivolous expenditures was enough to bring many companies to their knees. Even worse, many of these businessmen didn’t bother save money to cover for at least three or six months of their companies’ expenses.
To be honest, when I went full-time with my web design business I didn’t care too much about this either because I was jobless and in debt, but I did cut costs mercilessly, so the blow was manageable.
Now I save money and still keep my overhead as small as possible.
Runaway lifestyle inflation
Is the business growing nicely? Wonderful! Let’s get ourselves that new Porsche or a luxury house!
A few years ago, you weren’t a real business owner if you didn’t get your family a nice house in the ‘burbs or a fancy car. And I’ve seen way too many people get into such trouble because of their inflated lifestyle.
We all go there: as soon as the money comes easier, we spend more carelessly.
But spending a bit more on your groceries and maybe getting a decent pair of jeans is less dangerous than getting yourself in trouble with some very expensive stuff you cannot afford.
Which brings us to the final and maybe the “deadliest” small business mistake of them all:
Taking unnecessary loans
They may have called them a “investment,” but many small business owners just used their business loans to buy a new home or a car they couldn’t afford.
I tend to avoid loans as much as possible when it comes to borrowing money for my business.
For a business loan to really push your company forward, you need a solid plan, a great product or service that you already know people are craving for, some serious marketing, and a lot of courage.
So if you do need to borrow money for an investment, be careful and make sure you can pay the money back.
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Ramona is a small business owner and personal finance blogger who started and maintains Personal Finance Today.
Photo Credit: timetrax23
This is a great post Ramona and many of these tips apply to employees as well as entrepreneurs. Everyone thinks their paycheck is permanent, until they get laid off. Then, the car and house payments become an anchor.
I’m a salary guy, but three of my brothers have businesses. My Mom also had a business, before she retired. My brothers all survived the Great Recession, while many local businesses failed. Saving money and keeping costs low is the key.
Thank you, Bret, for the kind words.
I do agree with you … many people make similar mistakes even if they’re still employees. Lifestyle inflation is one of our biggest ‘sins’ and unfortunately it can really mess up our future.
Really happy to hear about your brothers, it’s not easy to keep a business afloat during such hard times.
Well written, glad that I followed the pattern you suggest many years ago. It was true then it’s still true now.
I think it is important to start out slow and small – like starting the business out of your home if you can, as it can cut down on a lot of costs. Great points, thanks for sharing!