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
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
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
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
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
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
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
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
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.
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