7 COMMON MISTAKES THAT CAN COST YOU A FORTUNE
by: Cary Christian

We've all heard of outrageous and even stupid mistakes people sometimes make in business. Many of the "best" stories get circulated on humor sites and in newsgroups dedicated to humor.

This article is focused on some mistakes that are not so outrageous. These are mistakes that can kill your business and leave you wondering where you went wrong. They are easy to make and not so easy to recognize when you're right in the thick of things.

These are not necessarily the top seven mistakes businesses make, but they are extremely common. Gauge for yourself how you stack up as you read through them.

1. Spending lots of money on advertising without tracking your results.

The amount of money a business will spend on advertising depends on a number of factors, such as how new the business is and the industry in which it operates. But one thing is certain: all businesses spend a high percentage of their income on advertising. It is probably safe to say at least 10 percent and and much as 50 percent of gross revenue might go to this expense.

Whether it's 10 percent or 50 percent, it's still too much money to spend without knowing how effective your advertising efforts are. I've seen businesses that exercise a great deal of control to make sure employees do not cheat them out of $25 on an expense report. Yet those same businesses might spend $50,000 on an ad campaign and not bother to take the steps necessary to determine if it was effective or not.

Advertising for the sake of advertising is worthless. It must be targeted and result in additional sales revenue or you should not be spending the money. The only way to know this is to track and evaluate your advertising efforts.

2. Spending lots of money on advertising without calculating the required rate of return BEFORE you spend your money.

This mistake is similar to number one, but represents a mistake in planning and evaluation rather than in tracking. Let's use a simple example to illustrate:

You sell product A for $50 and it costs you $30 to buy it. You make gross profit of $20 from every sale of product A. You make one sale of product A for every 100 visitors to your site.

You decide to bid for keywords on a pay-per-click search engine to sell product A. Products in the same category as product A are hot commodities and other companies have bid the top keywords up to 35 cents per click. You determine that you're going to have the top position, so you bid 36 cents per click.

You get 100 visitors at 36 cents per click and make one sale. You get $50 in revenue less your cost of the product of $30 less $36 in pay-per-click charges. You lost $16 on the sale.

The only way to beat this result at 36 cents per click is if you can increase your sales conversion rate to 2 in 100 visitors. Then you would have made $4 on two sales. Still not good, but you're not losing money.

You must set a minimum rate of return on the advertising dollars you are going to spend and evaluate whether or not you can reach that goal BEFORE you decide to spend the money on the advertising. Otherwise, you're going to pour tons of cash down the drain in an effort that was doomed from the beginning.

3. Failure to take advantage of those free marketing techniques that build traffic and site loyalty over time.

Everyone online uses free marketing to some extent. What is unfortunate, however, is that most people choose to use those free marketing methods that are least effective.

Getting your site listed in the search engines and developing reciprocal links from complementary sites will pay big dividends in the long run. Concentrate on adding quality content to your site consistently. The search engines will find it, index it, and provide it to those searching for such information. Complementary sites will look more favorably on trading links with you as your content becomes more impressive and your visibility in the search engines rises.

These are long term goals, but the sooner you get started, and if you make it a priority, one day these free resources will be your best traffic resources.

4. Thinking tax planning is not necessary and believing that all government employees are either lazy or stupid.

Taxes can easily reach 30 to 50 percent of your gross revenue when you consider federal, state and employment taxes. To ignore this huge expense item, as too many businesses do, is probably one of the biggest mistakes you can make. Taxes CAN be managed with effective tax planning during the year. Businesses that thrive and prosper always have tax management plans in place.

Some businesses prefer to play the "audit lottery" by assuming their chances of getting caught cheating are minimal, and even if they are audited, many business owners believe government employees are too lazy or stupid to catch them. This is a very dangerous attitude to take. On the contrary, most government employees are hard-working, dedicated and many are very, very bright. Remember, the FBI tried for years to bring down Al Capone and failed. He was finally put in prison for tax evasion. The taxman prevailed where the FBI could not.

Also remember that the line between civil liability and criminal offenses is not that difficult to cross. If you get a governmental criminal investigator on your case, you're in for tons of grief.

Plan for and manage your taxes. It is less costly and you'll sleep a lot better at night.

5. Failing to consider the tax consequences of a major transaction until after it is done.

It never ceases to amaze me that people buy and sell businesses, merge with other businesses, liquidate businesses, and so forth, without first considering the tax consequences of their actions. There are provisions in the law that make many of these types of transactions tax-free or tax-deferred if the transaction is structured properly. In order to be structured properly, it must be planned BEFORE the transaction is carried out. Doing the transaction and then worrying about the tax consequences is just asking for trouble.

6. Failure to realize that the good will of your customers is the only reason for your existence.

I've known a few professionals who were so rude and crude that I often wondered how any of their clients/patients/customers could stand doing business with them. In fact, these individuals were simply so brilliant in their field, they could afford to treat people badly and still get all the work they could take on.

It doesn't work that way for most businesses. Your customers are your most valuable assets. It cost you something to obtain every customer you have. Each customer represents a revenue stream for your business. How large that revenue stream is and how long it lasts depends on how you treat them. You must come to the realization that their continued good will towards you and your business is worth far more to you than a one-time profit. Treat them like gold because that's just what they are!

7. Failure to delegate or to delegate properly.

In order for any small business to grow and prosper, there comes a time when the owner must release some of his or her control to others. Not delegating authority and responsibility dooms you to a lack of growth. At some point you must start to become a mentor and a resource. Grow your people in your image, teach them what you know, help them through the rough spots, build in controls to protect the business, but by all means give them the reins in their area of responsibility and get out of the way.

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It just keeps getting tougher to compete in business because of rapid technological change, increased regulation and fierce competition that is becoming more global every day. Avoiding the mistakes above is one way to give your business a chance at being a profitable survivor.


Copyright (c) 2003