Seven Ineffective Business Habits*

*With apologies to Steven Covey.

I know people are incredibly fond of Steven Covey and his seven habits of highly effective people, and I have to agree, these habits are great ones. Being proactive, looking for win-wins, and just about everything on his list are things I try to do and would prescribe for any business.  I think this also calls for a counter-point, the common things people do to get in their own way and prevent themselves from being highly effective.  Here’s my list:

1. Penny wise, but Pound foolish.  Sometimes in order to save money in the short term, or when starting out a new venture, we skimp on things that may really cost us a huge amount down the road.  Think about getting a cheap water heater that breaks in three years, where spending a little more would have gotten you something that would have lasted ten years or more.  Which is really a better decision?  For businesses, avoiding things like setting up business accounts properly, partnership agreements, and the like can really burn you later on if something bad happens, and can be more expensive to undo and redo than it would have been to do it properly in the first place.  But like the man says, “You pay your money and you take your chances.”

2.  No Contingency Plans. Too many people fail to plan for the rainy day.  That rainy day may take the form of someone getting sick, dying, leaving the business, you name it.  A corollary of “Don’t put all your eggs in one basket,” you need to pray for the best but make some plans for the worst or at least possible “What if” situations.  With no planning for at least a few more common “what if’s”  will leave your business vulnerable and without a plan if something bad does happen.  While every battle plan will need to be altered once you enter battle, so to speak, at least you will have a starting point from which to improvise.  Without this starting point, many businesses lose valuable time and money, not knowing where to start digging in if things go south.

3. No Idea of the Business Burn Rate. Every business, no matter what size, needs to know how much money it takes them to “stay alive” each day.  Online tools like the Freelance Calculator can help a business or even a housewife, figure out the amount of money it takes to run the business every hour of the day.  I refer to this as a “burn rate” – the rate at which you burn money whether you are doing business or not, under the conditions you set forth in the calculator.  This produced a number that is your “break even” number- the amount of money per day or per hour you have to charge to cover all your expenses.  Your actual billing per hour amont needs to be higher than your burn rate to make a profit; any work taken below your burn rate will actually “cost” you money to take.  Charging your burn rate keeps you paying the bills, but won’t get you ahead.

4. Not Knowing Your Cash Flow. So many people don’t really understand the cash in and out of their bank accounts, let alone their business.  While “just in time” delivery and payments work well for businesses with large bank accounts, can you deal with the fact that in this economy in particular, clients and customers may pay you not immediately, but 30, 60 or 90 days late?  What happens if they fail to pay you completely?  Can you weather that storm?  You need to be able to both book the cost/time of incoming business and figure out when the payment/revenue from that work will be received, but you have to be able to have enough resources and/or enough business booked that you can deal with a client paying late, and still meet your basic obligations to keep the business afloat, ranging from payroll, to taxes to rent, electric- you name it.  You have to be able to count on clients NOT paying as well as paying and still make it through.  Knowing your cash flow and planning for late payers is critical.  You may be getting by without it, but I promise you it will likely bite you sometime in the future, because it can bite everyone.  Don’t let someone else’s business and responsibility issues become your problem as well.

5. Not Understand Scalability and Outsourcing. Like understanding cash flow and burn rate, many businesses have to figure out the true costs of both hiring someone to help you grow your business and the cost of outsourcing.  Hiring an employee has direct wage costs, but also accounting costs for withholding, tax deposits, benefits, unemployment insurance, etc.  You may need to add a desk to your office, another computer, phone line, etc.  But if that extra employee also generates  additional income or does things that let your generate income at a higher rate and take on more business, they may be well worth the costs.  You just need to really understand how much more business you can anticipate taking on additionally before hiring someone and taking them on- it’s like having a child.  Even with outsourcing work to a subcontractor, you need to consider factors ranging from their hourly/project rate, what you can reasonable charge your client in turn and still turn a profit, your time costs in managing the subcontractors, and ensuring what happens if the sub is not performing up to par.

If business is getting to be too much for you to handle on your own, definitely consider taking on employees or subs to help you grow.  But do be aware of the costs, even the hidden ones, beforehand, so you are prepared to even carry employees for a bit if the work flow slows down.  (It may be cheaper to have them less busy for a period of time rather than lay them off, pay unemployment and rehire.)

6.  Too Many Friends and Family in the business.  One great way to temporarily scale your business is to get “free” help from friends and family.  Sometimes this help ends up getting paid and becoming a trusted, inside resource for your business.  It seems great to work with people you love!

However, sometimes, the lack of objectivity and distance between work and home can be stressful.  One guy I know had his mom and dad helping him manage a health practice,  and the business decisions made, often by the parents trying to “help” or “protect” their son, almost ran the business into the ground.  It ended up causing a rift in their relationship that’s going to take a long time to repair.  Consider also what would happen if there’s a fall out between friends unrelated to work, someone’s marriage fails, who knows what?  Will this potentially put your business at risk?  Sometimes, working with family is great, but other times, it can cause some pretty hairy problems, and you should go into any of these situations prepared for this (hopefully) unlikely contingency.

7. Missing a Neutral, Outside Opinion/Walkthrough. I have a few friends I trust to look over proposals, contracts, grants, etc. or review projects, not only to act as editors, but to make sure that the process from beginning to end seems to make sense and have a flow.  Without an objective outside viewpoint, and here I mean someone with no stake in the project and who has no incentive to tell you anything other than the truth, you may miss a flaw or something you didn’t see when putting your project/service/proposal together.

I look at this as not so much market research as “idiot proofing” a piece of work.  I know when I am close to a project, I can’t always see it with fresh eyes, and having someone else, especially someone you’re not related to, give it a brutal once over is the best critique you can ever get.  I need someone to look at the thing, make sure it works, it makes sense, and there are no glaring holes.  If it passes the neutral third party test- a dress rehearsal, if you will- then it’s likely ready for prime time.  If it flunks the third party test, it may need some refinements first, and that’s some of the best feedback you’ll ever get.

While these things may seem obvious to you, you’d be surprised how many people get hung up on some of these basics.  In the rush to get going, lack of planning may come back to bite you and do more harm that necessary.  While we all try to skimp on the edges, remember that you can get away with it for a bit, but look at it as only temporary, and set a deadline to re-evaluate.  Re-examining things like cash flow, contingency plans, infrastructure and insurance, at least twice a year will help keep your business running smoothly and avoid the pitfalls that just might otherwise submarine your whole operation.

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