Management Tips

20 Common (and Avoidable) Mistakes Business Leaders Make

Building a successful business isn’t an easy task, especially in today’s competitive environment. Business leaders have to be persistent and have a clear focus on where their company is headed. They have to recognize problems early because some problems can’t be fixed after they go too far.

In the spirit of looking ahead and taking corrective action before hitting a barrier, let’s take a look at 20 common (and avoidable) mistakes business leaders make that can grind their business to a halt:

1. Irregular Performance Reviews

Business owners should spend some amount of time every month with their trusted advisor(s) and their management team to review financial performance and get everyone focused on areas needing top priority attention.

2. Lack of a Process

Right along with processes for doing the work of the business, there should be formalized processes for monitoring business performance, prioritizing, exploring solutions, assigning responsibilities, and then cycling back to monitoring.

3. Numbers without Connections

A lot of information is looked at in isolation. Looking at performance data as an interconnected matrix can change the whole picture. Knowing the relationships between numerous performance metrics helps pinpoint places where single adjustments can be made to drive many improvements.

4. Overly Broad Analysis

We need to do more than look at a business as if it was a single entity. In actuality a business that has been alive for more than a couple of years usually has multiple lines of business (LOBs). Each is a business within a business. Each has a P&L with gross profit, margin, a share of the overheads and bottom line net profit. When businesses are tuned at the macro level instead of at the LOB level, there is a high probability that the wrong thing is going to get “fixed.”

5. Stuck in Detail

There is a big difference between getting things to work right and getting the right things to work. It is very easy to fix things that shouldn’t be part of the business process in the first place. Many processes are continued because they were important at one time. No one has stopped to see if they are still needed or if they are providing a meaningful benefit. This is especially true of reports that were requested in the past and no longer used but still produced.

6. Eroding Financial Strength

Many businesses focus on P&L performance and skip the Balance Sheet. Managing Balance Sheet trends and ratios are just as important as managing the P&L. When management intentionally works to achieve good ratios, it ultimately builds a more valuable company.

7. Draining Cash

Many accountants encourage their clients to drain cash as part of a plan to minimize taxes. In many cases this is damaging to the long-term value of a company. Sometimes the reason cash is vanishing is because of unhealthy growth. If cash is depleting as a company grows, there is a strong possibility that growth is damaging and could push the company off the edge of the cliff.

8. Runaway peaks and valleys

Peaks and valleys in workload can be very damaging to a company, especially if the company is paying for staff needed to support the peaks and are then idle during the valleys. This calls for adding revenue sources that can fill in the gaps or provide a bigger base of recurring revenue. The greater the peaks and valleys the lower the value of a company in the market.  Consistent revenues mean predictability and predictability means higher value.

9. Not Ready for Exit

Most business owners do not have a plan for building their company’s market value and are not prepared to sell the business if something were to happen. This is tragic for many companies. When the unexpected happens, the owner finds out that with just a few adjustments they actually could have had a valuable company to sell, but it’s too late to fix things up when you must sell quickly. An even more important benefit of being prepared for an exit is the discovery of new and important ways to make a business run more efficiently and more profitably.

10. Management Team not Good at Problem Solving

Many business owners view themselves as the direction setter, the problem solver and, often, the guy that does the complicated work. This prevents the management team from building a competency in problem solving. The owner needs to step back from being the go-to-guy as the company grows or this will be the reason that the company doesn’t grow. One of the last security blankets the owner wants to release is the role of being the only decision maker.

11. The Owner is the Expert

This is the classic story of business founders that are the expert and want to be seen as the knowledge center and decision center of the company. This is closely tied to #10, but this mistake extends past the management team and involves customers. When the owner is seen as the expert by customers, the business will screech to a halt if the owner steps back for any reason. No one is interested in buying this kind of business and most customers will tend to move away from a one-man show because that is too risky in the long-term.

12. No Advisor

No professional athlete would ever consider not having a coach. No professional business person should be without an advisor. This can be accomplished in many ways: peer groups, financial advisors, consultant, investor, etc. Having an arms-length advisor is almost as bad as not having one at all. If the advisor is not able to see the meaningful detail of business performance from month to month it is highly unlikely that they are going to provide meaningful input to your business.

13. No Board

Not building an advisory board or external board of directors can be a huge mistake. Different than an advisor, the board can serve as a think-tank, provide connections to external resources and become an important part of the image of the business to the outside world. A company that is in a major state of flux should lean more toward an advisory board. When the path to growth and investment are more clearly defined, that is the time to bring outside professionals on to the Board of Directors.

14. Advice from Bookkeepers

Accounting advice and financial advice are not the same thing. Many new business owners don’t understand this distinction. Accounting includes looking backward and making sure that records and reports are accurate and complete. Financial advice consists of looking forward, planning and setting goals. It is highly unusual for one person to provide both perspectives. Even when they can, it is often not a good idea. These two perspectives often need to be in healthy opposition to get the best results.

15. Stuck on a Plateau

It is very common for companies to hit a growth plateau and stay there for a while. Getting comfortable and staying on a plateau is often the first step to going backward. Often a plateau is an indication that the company’s management processes and organization capacities have hit their limit and attempts to get past those limits are not working.   Getting past the plateau will usually require some kind wakeup call (hopefully not a disaster!)  and, many times, outside influence to help get back on a forward moving track.

16. Repeating the past

The things that made you successful in the past are often not the things that are needed to make you successful in the future. Using the phase “this is the way we have always done it” is the first clue that a company is stuck in its own folklore. Everybody and every organization tend to resist change but there is no way to move forward without taking new steps. Moving away from the comfortable and into the uncomfortable is, well, uncomfortable. But that is the only way companies grow.

17. Not Listening to the Market

Deciding what the customer wants without validating the assumption is dangerous but common. A more precise way to provide what the market is seeking would be to start with customer feedback and then pilot test on a small scale. Then, only after demonstrating that the new idea works, should it be promoted and delivered on a larger scale. This incremental approach, with validation at each step of the way, can eliminate many mistakes, avoid runaway costs, and improve the likelihood long-term success.

18. Betting Big on One Idea

This is the “all eggs in one basket” scenario. It is better to assume that it will take multiple business offerings to build a successful and sustainable business. You can think of this like building a portfolio. A successful portfolio has diversity. It contains multiple complementary assets, some more mature elements and some unproven elements, some high risk and some low risk elements, with most of them in between the extremes.

19. Not Achieving Balance

As a continuation to #18, an evolving portfolio of business offerings requires constant tuning and adjustment. Some parts will prove to be low performers and others will be winners. When you monitor and track performance of each part of the portfolio, you want to look for trends that show potential future problems so that you can make early adjustments rather than waiting until it’s too late to correct them. Monitoring for early signs of problems and opportunities is critically important to obtaining top performance from each part of the portfolio.

20. Seeing Problems Too Late

Everybody is good at 20/20 hindsight. It’s always easy to explain why a business failed and what could have been done to prevent it – after the fact. The only reason businesses fail is because they didn’t take corrective action in the face of some problem or circumstance. Seeing into the future is never perfect, but developing the skills and the right feedback mechanisms can make a huge difference. Predictive analytics is one approach but certainly not the only one. Solving for the 19 mistakes above will go a long way toward solving #20.

The above mistakes and the actions that can be taken to avoid them are expanded on in my new book targeted for release in June 2014. The title is Pulse: Understanding the Vital Signs of Your Business.