85 - The 13 Money Mistakes Most Business Owners Continue To Make

For those who’ve beaten the odds to create a successful business, congratulations. But your challenges are only beginning. This is the phase where millions of viable organizations will now trip on their long term planning or will miss the factors that could be bringing greater profitability from current operations their way.

1. Focusing on the topline, not the bottom line

Entrepreneurs are notorious braggers. If you hear that your competitor has hit $10 million or hired 10,000 employees, your first instinct is to figure out how to top that total, correct? Yet under the covers a much smaller business could be operating at a higher level of profitability and may well be the stronger organization overall.

Every dollar that you create and protect as bottom line profit is much more valuable to your business and to you as an owner than the revenue dollar you create at the top. Can you streamline processes? Save on inventory? Save on taxes? These are the more valuable questions you should be asking yourself. But most business owners and operators don’t, or at least they don’t do so with sufficient accuracy and skill.

2. Diversifying prematurely

Where should you invest your profits? Here’s a novel idea, Gunderson suggests: Why not invest it in your own business and also invest in yourself? “Focus, don’t diversify,” Gunderson says. “Build opportunity for your business by retaining the cash in your business as an opportunity war chest.” Cash is your best first investment, Gunderson maintains, as it allows you to make good choices. When you’re low on cash you accept bad clients. “Time terrorists,” he calls them. But when you have sufficient cash and apply it to the things that you know, you can grow.

“Dentists don’t know real estate. I don’t know social media; therefore it’s a bad idea for me to invest in Facebook stock,” Gunderson says. “I understand business and money. It is most valuable to invest in your own business, and after that, invest in the things that you know.” At the end, there are no bad investments, Gunderson says, just bad investors.

3. Investing in a 401K

Okay, this is clearly one of the sacred cows. The money a business owner invests in a 401K is meant to defer income for retirement as a means of saving taxes (more on that point in item 13). But the investment takes vital dollars that the owner could instead be using to invest in growing the business itself. Gunderson also points to the impact on an owner’s self esteem when the balance in a 401K account decreases: “It isn’t even the losses in the account that harm the business as much as the way business owners feel about themselves and their value and wealth when the account balance is down. It’s like a punch to the face, and they feel (perhaps even rightly) that they have no control.”

4. Failing to focus on the right value equation

Dollars follow value, Gunderson maintains. The two greatest forms of capital in a business are the mental capital (your product and service expertise) and relationship capital (your audience, platform, organization, clients, family and friends).

Mental Capital + Relationship Capital = Financial Capital. When these factors are in balance, the organization can shine. When they’re not aligned, however, the effort to work harder on a bad philosophy will not produce good results.

5. Failing to realize that rookies stay invested, but professionals sit more fully in cash

Have you ever noticed that the greatest investors are typically sitting in cash, not investments, for a surprisingly high share of their time? Likewise, business owners feel too strong an urge to invest in “this and that” and are not invested strongly enough in protecting their liquidity by maintaining sufficient buffers of cash. What is the greatest cause of business stress and eventual failure? Generally, it’s not a problem on the balance sheet. It’s the lack of sufficient operational cash.

6. Failing to invest in people

Too many business owners hire too cheaply, Gunderson says. This is flawed thinking. Instead, they should be hiring the best. They should also invest in the technology and expertise that allows them to streamline procedures and to eliminate the necessity to duplicate processes wherever possible as the company grows.

7. Failing to realize there is no such thing as a passive income

There is never something for nothing, Gunderson acknowledges. Recurring revenue creates less work as time goes on, and is a worthy goal to strive for, but if you don’t manage the revenue at every stage, ultimately, the efficiency of outcome and even the revenue itself will go away.

8. Doing too many things themselves

As a business owner there are things you do better than anyone you know, and so you continue to do them yourselves and procrastinate the hiring of others to handle those tasks, or you avoid paying for quality, saying “If you want it done right, do it yourself.” This is flawed thinking that doesn’t allow your business (or even your own capabilities) to grow, Gunderson says.

9. Listening to financial managers who have a “cut back” mentality

The worst advice financial managers give business owners is to tighten your belt and cut back on spending, but they can’t tell you where. Or, in a similar vein, they tell you to augment your business cash flow by getting a second job. Really? “If you’re a dentist and you take a second job, you’re no longer my dentist,” Gunderson says. “This is a reduction mentality instead of a production mentality, and is fundamentally flawed. If you used that time instead to properly focus your attention on your business just a little bit more, you’d succeed.”

10. Failure to recognize that loans and debt can be good

In the business, do what it takes to create spendable cash for the owner, Gunderson says. (Presumably this is spendable cash to be used to increase business outcomes, and not to create extra bonuses for the purchase of vacation homes and luxury cars.) The traditional thinking, Gunderson notes, is that when you have extra money, you use it to pay whatever is due next or to chase the highest interest cost on your balance sheet and pay it off first. But the better idea, he says, is to take the loans you have, divide by the monthly payments, and apply your cash to the item that provides you with the lowest cash flow index first. Credit cards have the lowest cash flow index, meaning that if you pay them first, it frees up and improves your cash flow the most.

“The number one factor for credit is your debt to income ratio,” Gunderson says. “If I can improve my credit by improving that ratio, I can get a better rate on every loan that I have.” (As an aside he points out that 80% of Americans can’t get the best loans available right now due to their inability to manage this ratio. He also notes that 1 in 4 have a mistake that currently sits on their credit reports unresolved because they aren’t closely managing their credit and cash.)

For businesses, an even bigger idea Gunderson suggests is to go for 3-6 months paying only the minimum amount on each debt and apply the additional money to the area of the business that is currently most vulnerable instead. He calls it a “90 Day Debt Delay.” “It will ease their stress and improve their business far more than the benefit of paying down the equivalent amount of money in debt,” he suggests.

11. Thinking that simply working harder will move your business ahead

The least understood and most valuable commodity towards growing a business is strong vision, Gunderson maintains, and the ability to articulate it well. As a great example of this, he cites the case in point of JFK going on television in 1961 and saying we’ll get a man on a moon within this decade and we’ll get him home safely.

The team never gets tested or upheld, and the business owner burns out. Days out refresh the mind and allow the team to learn to make better decisions. When you think about it, most people are doing nonproductive things all day long. Create the opportunity for them to step up, and in most cases, particularly if you’ve hired and trained correctly, they won’t disappoint.”

12. Thinking you have to work more to get more

“If you’re making $100K a year and you find out others in your role are making $125K a year you’re suddenly unhappy,” Gunderson says. “But when you really address the strategy of your company, you’ll recognize the ways to increase your efficiency, your team’s productivity, and the reach of your business–and your profitability and income–without working more, simply working more strategically and better with the resources you already have, or are within your available reach.”

13. Overpaying your taxes

This is not a bid for exotic strategies such as offshore accounts, Gunderson says. But these problems are most typically the result of simple issues such as not incorporating. A sole proprietorship, for example, has unlimited liability, Gunderson maintains, since it doesn’t allow you to differentiate the income that is offset by expenses related to work and they end up overpaying on self employment task.

But even as a one person entity, by creating an S-Corp you can take salary and dividends on training, working on business training and not be subject to the 15.3% self employment tax, he maintains. Also, consider the strategy of cost segregation, which is an accelerated form of depreciation for business owners who own the building they are using for running their business.

Here’s another tax-related surprise: Gunderson loves paying taxes. I admit to being guilty myself of the traditional rash of business spending at the end of the year on allowable expenses to avoid taxable profits. “It just doesn’t make sense to spend $1 to save $.40,” Gunderson says. “I’d rather pay $10M in taxes than $1M, because I need to make so much more to pay the $10M.

Yet accountants are notorious reductionist thinkers. Cut, reduce, save, defer. The best tax savings is to earn another dollar. Too many people purposely stop earning more money because of their fear of paying more tax.” So don’t overpay your taxes, Gunderson says. Of 117 people his business examined and tracked data for, he points out that 107 had overpaid their taxes by an average of $11,210 apiece.

Read the full article here: Forbes

All the best!

Patty Block