Business owners get lots of well-meaning advice. The challenge often lies in separating the good suggestions from the bad.
Whether it’s from your parents, your neighbor or the guy who rings up your groceries, there’s often no shortage of advice, especially for small-business owners. However good someone’s intentions might be, some advice can be just downright terrible.
Here’s my list of financial advice you should think twice before taking.
1. You have to write a traditional business plan.
One of the key components of a traditional business plan is a forecast of financials. Here’s the truth, though: No one knows what any business is going to do over the next five years, much less a new business. Rather than wasting your time making up numbers to plug into a plan that may or may not be accurate, you may be better off spending your time defining your vision and adjusting dynamically as you grow. And if you do have to write a plan in order to satisfy the bank or an investor, don’t feel like you’re a slave to it. Business is dynamic, and it helps to be poised to capitalize on opportunity.
2. You have to raise money.
While some folks may tell you to chase investors to generate rapid growth, until you’ve figured out your formula for generating your own money, you’re not ready to wisely spend investors’ dollars. Learning how to make a profit before you plow other people’s money into your untested plans is often a better plan. Don’t fall into the trap of spending your time raising money instead of making money.
3. Never quit.
While being an entrepreneur often requires determination, there are times when the best decision may be to stop pouring money and energy into an idea that just doesn’t work. If things really aren’t working, you should consider changing, shifting or quitting, rather than carrying on with the same old unworkable plan.
Don’t fall into the trap of spending your time raising money instead of making money.
4. Plow back your money.
If you’re unable to take a salary because you have to “reinvest” your pay to meet expenses, you’re fooling yourself. If your company can’t meet expenses, you haven’t found your profit formula yet, and throwing good money after bad may not help. Focus on running a profitable business from the get-go.
5. Looks matter.
Some people swear you have to have an office in the right part of town and drive an expensive car to look successful, but it can be foolish to spend money on things your clients will never see. You may have to invest in location for a retail shop, and if you’re driving to client meetings, a decent car might affect your image, but don’t waste money on things that don’t directly affect your bottom line.
6. Incur expenses to reduce taxes.
A caveat here: Sometimes it makes absolute sense to purchase business supplies at the end of the year to offset a little profit, as long as the purchases really benefit your business. What doesn’t make sense is blowing money on frivolous things. It’s silly to burn $10 to avoid burning $3. Be sensible.
7. Profit comes last.
This is probably the most common belief, and it may be the absolute worst. We’ve always been taught that income minus expenses equals profit—profit being what’s left over after we take care of the important stuff. Wrong! Think about it: You wouldn’t decide to get healthy and think you’ll eventually get around to adding some exercise to your routine. You add the exercise first. If profit doesn’t come first, you’ll never get around to it. Take your profit first, and manage your expenses on the money that’s left.
Good intentions don’t just pave the road to hell. Sometimes they pave the road to failure. Just because friends want to see you succeed and offer advice doesn’t mean they’re qualified or experienced in running a successful business. Trust carefully. Follow the advice of entrepreneurs who’ve been in the trenches and fought their way to success.
Author: Mike Michalowicz
Author, Profit First