Shawn Porat is the CEO of Fortune Cookie Advertising, a non-traditional and out of home media placement company selling advertising space within fortune cookies at Chinese restaurants throughout the United States.
No mistake can sink a new business faster than undisciplined or unfocused budgeting. This is sometimes referred to as overspending, but what it really means is spending on the wrong things at the wrong time. Money well spent can lead to profits quickly. Haphazard spending, on the other hand, will only deplete you of the capital that you so desperately need to stay afloat. This is a mistake I made in several different ways in some of my earlier business ventures.
Mistake #1: Incurring Too Much Debt Upfront
This is one of the fastest ways to get in over your head. Business loans, as well as funds borrowed from friends or family members, can help you get your business off the ground. However, you need to be very careful about how much you borrow and under what terms. When you create your business plan, make sure that it's practical and workable for you as well as for the person or institution who will be funding you. In one of my first businesses, I incurred a lot of credit card debt to get the operation off the ground. The business ultimately failed, and it took me several years to get out from under the debt I had taken on. Looking back on it, I should have moved more slowly and built the business up gradually rather than borrowing a large chunk at the onset.
Having a large amount of debt can quickly spiral into a nightmarish situation. As a general rule, look for ways to streamline your expenses and re-investing profits rather than borrowing more money. It's better to fund your future growth with profits rather than with money you have to pay back along with interest.
Mistake #2: Investing in Unprofitable Advertising
Advertising is another area where it's all to easy to overextend yourself. This can be particularly treacherous, because you can tell yourself that you are building brand awareness and attracting new customers, leads or website traffic. The problem is, much advertising tends to be wasted money that brings insufficient returns. When I put up my first business website, I assumed that the best way to get lots of traffic (and make sales) was to pursue an aggressive Google AdWords strategy. This turned out to be a big mistake. As I later found out, the type of advertising I was doing was more effective for getting leads than selling products outright (which is what my ad campaigns were attempting to do).
Before you do any type of advertising, make sure you set specific goals. Many types of online advertising, for example, are better suited for getting leads than for directly selling a product or service. This means you need to have a sufficient budget to think long term, since it may be at least a few months before you start seeing returns on your advertising.
Always do thorough testing and tracking of your advertising. This allows you to determine how effective each campaign is and alerts you to signs that you need to change your approach. If I had done more of this early on in my Google advertising efforts, I would have wasted far less money.
Finally, if you are starting a business with a limited budget, look for alternatives to paid advertising. This may include search engine optimization, various types of guerrilla marketing and online content marketing.
Mistake #3: Purchasing Products and Services You Don't Need
People who are anxious to get their businesses up and running don't always do enough comparison shopping when choosing essential products and services. This isn't to say that the cheapest solution is always best. However, there's no reason to spend 25 percent more on something when you can get basically the same thing for a lot less.
In my own case, I overspent on more advanced and complicated software systems than our small company really needed at the time. Not only was it a big expense, but the learning curve needed to use this technology was a drain on everyone's time, including my own. A simpler system would have been both more economical and easier to use.
In the beginning, you should be looking for ways to streamline your expenses. Similarly, you should always do plenty of comparison shopping before choosing vendors or service providers.
Bottom Line: Be Frugal and Be Realistic
While some businesses are overly cautious with their spending, the other extreme is the more common mistake. Temper your enthusiasm with a realistic appraisal of where you're spending your money. Every expense and investment should be carefully considered so that your valuable capital doesn't leak away before you begin generating profits.