Ep 14: Top 3 small business mistakes to avoid

Learn what business mistakes you should avoid.

Top 3 Small Business Mistakes to Avoid

Featuring: Harvard Business School Senior Lecturer Christina Wallace

On Episode 14 of This is Small Business and the first of our This is Small Business Minisodes series, Andrea talks to Christina Wallace, senior lecturer at Harvard Business School, about the top three mistakes Christina sees early stage entrepreneurs make. Join Andrea for this Harvard-level crash course filled with helpful takeaways that are going into her small business playbook.

Christina Wallace, Senior Lecturer at Harvard Business School

Episode Transcript

[00:00:00] Christina: There's a lot of different ways that you can think about mistakes. Sometimes you have to do something the wrong way, and that's what tells you, there's a right way.

[00:00:10] Andrea: I love that. Let’s reframe the way we see mistakes, right? So, after all, it really comes down to what a mistake means to you, right? They can be areas of opportunity or important lessons to carry with you throughout your journey and sometimes the only way to learn something is by making a mistake. And that’s just part of the entrepreneurial journey. But even with all that in mind, some mistakes can be avoided if you borrowed someone else’s learning or if you would’ve done more research. I’m excited to talk about some of the most common mistakes you’ve seen.

[00:00:43] Host: Hi, This is Small Business, a podcast by Amazon. I’m your host, Andrea Marquez. This is the first of many shorter episodes of our series called This is Small Business Minisodes. We know you don’t always have time to listen to longer episodes so these are packed with helpful information in 10-15-minutes.

[00:01:00] On this episode we talk about the top three small business mistakes that early-stage entrepreneurs make. I’m speaking to Christina Wallace. She’s currently a Senior Lecturer at Harvard Business School, where she teaches entrepreneurship and marketing.

[00:01:18] Christina: The first one is you don't have to do everything yourself. Build a bench. And this one is hard because I think a lot of small business owners, they like doing a lot of different things and they also have their eye on the bottom line. It's cheaper to do it all themselves. But you do this and you can burn out, which is not helpful to the business in the long run. But also, you're not an expert at everything. Maybe you shouldn't be the one doing the tax return. Maybe you shouldn't be the one negotiating those deals or thinking through that operational complexity.

This one, this one is so hard. I absolutely suffer from this one. People who are creative and, entrepreneurial, [00:02:00] they're interested in kind of, tinkering and learning on the job, right? A lot of this is what makes us want to be small business owners, and yet burnout is real. And if you have everything sitting on your shoulders, it's called a key man risk part in the gendered nature of that phrase. But it can't be all on you. Another way that we phrase this as the hit by the bus test, if you get hit by the bus, as gnarly as that might sound, will your business survive? And if the answer is no, that's a huge risk in your business. You don't want the answer to be no, right? You want to have something in place that can survive you.

A couple of tactics here. Hire slowly. But as you hire, look for employees that have an owner's mindset. I know it can be scary to bring other people into your business because they're not gonna care about it as much as you will. That's just a fact. But there are absolutely [00:03:00] people out there who have an ownership mindset, who want to be a part of something bigger than themselves, and you can evaluate them and compensate them, incentivize them. Along those lines, you can think about giving them a small piece of equity or giving them bonuses at the end of the year based on the success of your firm. So that they have the bigger picture as part of their motivation. And not just what am I being paid for? What's on my job description? So, hire slowly, grow your employees, incentivize them accordingly.

And lastly, surround yourself with good advice. So one of the things that small business owners often suffer from is you may not have a board of directors, you may not have folks that you are turning to on a regular basis to help you dig into those issues or to hold you accountable for some of the goals that you're setting. So how can you create almost like a synthetic board of directors? You're mutually invested in each other's success, [00:04:00] but you bring to the table different skills, different networks and you are dedicated to helping each other succeed.

[00:04:09] Andrea: You mentioned something that resonated with me and probably with every small business owner, which was, it's really hard to get people to care as much as you do, and that ends up making you feel like you have to take everything on, on your own, but that doesn't have to be the case. So, let's move on to the second mistake.

[00:04:32] Christina: The second big problem that I see, over and over again, is just about managing cash flow. Cash is king, right? Revenue is great, profit is better, but cash is what's gonna make the difference about whether you stay in business or not. So especially if you are in the position to grow you keep your eye on the cash flow forecast and don't grow out of business. If you're thinking about what's my revenue for the year, or what's the profitability, whether it's on a unit basis [00:05:00] or across an entire business line, that is ultimately, that's the money that we get to keep and feel like we've been compensated for the risk we've taken, the effort we've undergone. But you can run out of cash in what is otherwise a very profitable business. So things like a business that has extreme seasonality where you might get all of your revenue in a part of the year but you have systems or people, or expenses that run the full year long.

Also situations where you might have a long time before you get paid by customers. If you're in a business that sells to other businesses quite frequently, you might have payment terms that are sixty, ninety, a hundred and twenty days. So you're performing the work you have to pay employees for having done the work. But you're not getting paid for a couple of months. So even though on a net basis it's a really great business, in the short term, how are you gonna pay rent? [00:06:00] How are you gonna make payroll? So keeping an eye on cash is going to be the most important lever. Otherwise grow out of business for what is otherwise a successful business.

[00:6:11] Andrea: And what are some ways that a business can manage their cash right?

[00:6:14] Christina: So a couple of key ways to do this. Number one, put liquidity in place before you need it. So think about things like a revolver or a line of credit at a bank. You can go out and get even just a really, bare bones and unsexy, loan from your small bank, that just provides you a little bit of that cash cushion to prevent those crunches. Second, you wanna keep an eye on any lumpy cash flow throughout your year. So, this is hugely dependent on whatever business you're in the industry, the geography, so many moving pieces. But you will know best if you are gonna have lumpy cash throughout the year. Or if it's pretty consistent month over month. So, you wanna have visibility, you don't wanna be surprised by [00:07:00] this cash flow situation.

And then lastly, be creative. So if you're in a business that gets paid 3, 4, 5 months later from your customers, maybe go and try to negotiate something a little better. Talk to them, especially if you are smaller and they're a big company, they might have standard terms, but you can say, look, we're a great partner, but we're gonna go outta business if you keep insisting on these terms. Do you have flexibility? So just really thoughtful ways to say, I don't have to accept the cash flow as it is. I can make the cash flow be what I need it to be, and be proactive about.

[00:07:38] Andrea: Let’s jump into the last mistake to look out for.

[00:07:41] Christina: And then the last one is really about premature scale. So, particularly if you think you've got a great idea, you're excited about what you've built, you are wanting to grow. The next big question is, okay, what next? How do we scale this? And the problem there is that if you haven't [00:08:00] really figured out all of the pieces of the business model that fit together, you haven't put the right resources in place and the right systems in place, you might scale something that's broken. And, fixing a scaled problem is way more expensive and hard than fixing a small problem.

So everyone is motivated by this idea of growth, right? That all of your friends, your neighbors, your spouse is like, you have a great thing going. When are you opening the next location? When are you expanding? And that's great. That ambition, that vision is amazing. But before you scale, you wanna be super clear on the usually one to three metrics that drive your business. What are those things that actually are the engine of what makes you money? You wanna be super clear on that because that is what you're gonna keep your eyes laser focused on as you grow this business and [00:09:00] you wanna be sure you have the resources in place, the team, that bench, the capital, that cash flow, you wanna have those resources in place before you start out deciding you're gonna go sign a lease for that location or you're gonna go and add that new product line.

And then the last one, which I think is just as important as the first two is be sure you want to scale. Not everyone wants to build an empire and that's okay. There's a lot to be said for having a modest, profitable, really, wonderful business that might be able to empower you to have all the other pieces of your life that make you happy. So, growth and scale for the purposes of being able to say, you are growing, you are scaling. It's not always the right choice. So make sure you know what you want.

[00:09:49] Andrea: That was serial entrepreneur and Harvard Senior Lecturer Christina Wallace giving us a Harvard level crash course in business. If you didn’t take notes, not to worry, because here are Christina’s top three [00:10:00] mistakes to look out for if you’re starting out:

  • Build a bench. I know it’s difficult when you’re a small business and especially if you’re a creative, but you don’t need to do everything on your own. Like Christina mentioned, if the business can’t run without you, then that’s a huge risk. So surround yourself with good advice and maybe you could try to slowly hire people who also have an owner’s mindset and incentivize them.
  • Manage your cash flow. Even profitable businesses can run out of cash especially those that get all their profits in a part of the year or that have to wait a long time before getting paid. So make sure you keep an eye on your cash flow, put liquidity in place before you need it and try to get creative with your solutions: maybe you could negotiate or get a deposit upfront. Just make sure you're being proactive about it.
  • Premature scale. Make sure that you have the right resources in place before you scale because fixing a scaled problem [00:11:00] is gonna be a lot more expensive than fixing a small one. And even though scaling and growth is great, it’s not for everyone and that’s okay. Don’t feel pressured to grow if you don’t want to.

That's it for episode 2 of season 2 of This is Small Business, and the first of our This is Small Business Minisodes, brought to you by Amazon. On the next episode, we'll be talking about a topic that keeps coming up: finding money. We'll be going into detail about bootstrapping, loans, and the often fear-inducing grants.

Meanwhile, if you like what you heard, please subscribe and tell your friends about us by sending them a link to this episode. And we want to know what you think. So, leave us a review on Apple podcasts – it’s easier to do it on your phone. OR email us at thisissmallbusiness@amazon.com with your thoughts.

Until next time – This is Small Business, I'm your host Andrea Marquez -- Hasta luego -- and thanks for listening!

CREDITS: This is Small Business is brought to you by Amazon, [00:12:00] with technical and story production by JAR Audio. [00:12:12]

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Planning
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