How not to run a business – 12 mistakes to avoid – tutorial – Cover Story
David H. Hudson
I run a one-man consulting business called dh Engineering. I’m a mechanical engineer specializing in finite element analysis (FEA), a service I offer to companies (such as Xerox and Kodak) to aid in the manufacture of products. My analysis requires specialized software that can solve hundreds of thousands of simultaneous equations. My professional field may be specialized, but I think my business problems are common. The main problem has been bringing in business, which is something all consultants have to deal with.
Follow me through my start-up and first six years, and use me as a great example of what not to do. Everything I’ve learned, I’ve learned by making mistakes. Here is some advice that may help self-employed people, or those contemplating quitting their current jobs to begin the long, hard journey into self-employment.
MISTAKE #1: DIDN’T HAVE A PLAN
Six years ago I quit my warm, comfortable position at a Fortune 500 company without a clue as to how I was going to stay alive! That was not very smart. I just wanted to run my own business, control my own destiny, and maybe make some money. I thought I could simply “hang out my shingle” and watch the jobs roll in. They didn’t. After a few months, the fear of never getting any business gripped me. My thoughts ran wild. What was I going to do? Finally, after six months, I landed my first job.
This entire scenario could have been avoided had I done my homework and gotten my ducks in a row before saving goodbye to that nice, steady salary. Not every new business needs a full-fledged business plan, but you must do some kind of advance planning before you have a farewell lunch with your employer.
MISTAKE #2: JUMPED IN FULL-TIME
The best suggestion I can offer is to start your new business on a part-time basis. This may not always be possible, but give the idea a lot of thought before you discard it. A part-time business allows you to keep the benefits of employment with your current company while letting you check out the potential of the new business.
My father ran a part-time printing business for five years before he quit his job and committed to it full-time. He continued his printing business for the next 25 years, supported his family, and made enough money to retire a 62–not rich, but comfortable. Yes, running a side business means working nights and weekends. But if the new business doesn’t work out, you’re not left hanging.
In my own situation, an association with an established consulting firm would have helped me understand the business and make contacts. I could also have bought into an established consulting business, which would have lowered my profit potential, but would have made me reasonably certain of getting some clients right off the bat. Or I could have tried to land some part-time analysis projects with small companies.
MISTAKE #3: DIDN’T GET A GOLDEN
Not only did I leave my job without having a plan–I left without getting as much of a cushion as I could have. My employer offered “reduction-in-force” policies almost once a year. If I had beem more patient and had maneuvered in the company until I qualified for a reduction-in-force layoff, I would have had more time to plan my move into self-employment. Of course, if you’re fired without notice, none of this advice helps.
If your current company offers reduction-in-force opportunities, take them. Most planned layoffs give you weeks of severance, medical coverage, and insurance.
Another note about leaving your employer: Never, ever burn you bridges. Even if your former boss is a complete jerk, leave the company on good terms. Your past employer can often be a source of income or references. I left my company with a smile and a handshake, and I’ve done contract work for them since I left.
MISTAKE #4: BELIEVED EMPTY
PROMISES OF WORK
Be realistic. Don’t expect anyone to help you. Take all advice (including mine) with a grain of salt. Promises of future business need to be written in a contract before you quit your job and start out on your own. I had several promises of consulting work when I started, but nothing on paper. It turned out that only one person actually gave me any work–and that was after six months had gone by. Welcome to the real world. It’s easy to become mesmerized at a large company and lose any idea of what life is like on the outside. Be careful not to fool yourself into thinking that the way you work inside a company will prepare you for life “outside.”
MISTAKE #5: DIDN’T MAKE COLD CALLS
No matter what type of business you’re in, you must generate sales. Without sales you die. How do you get sales? The only way is to inform potential customers of your product or service.
The most effective method of selling my consulting services is networking. This often means I have to make cold calls. I never feel comfortable doing this. But it has to be done. If I don’t make calls, my business dries up.
In the first days of my new business, I would always find some excuse not to make phone calls. It’s possible that I was relying too heavily on work from my former employer and didn’t think I really had to get on the phone. My business finally declined to zero before I was willing to make calls on a regular basis (at least once a week; better yet, once a day). Now, I know that if I make 15 or 20 calls, I’ll probably get a lead and maybe a job.
MISTAKE #6: WASTED MONEY
ON DEAD-END MARKETING
Doing direct-mail promotion, placing advertisements in papers and magazines, sending out news releases, attending professional meetings, writing articles, and holding professional conferences are some of the methods I’ve tried to attract new business. None of them worked for me. Maybe they will work for you. I used to do direct mailings to a list of 1,500 people. (Some names I bought, some I acquired through contacts.) I’d send out a brochure (at $1 a shot), a letter, and a business card, spending well over $2,000. But I can’t remember a single response that led to income.
I ran a $1,000 ad in a technical magazine, hoping to draw a good response for a finite element analysis conference that I had put together. Three people responded, and not one of them attended my conference. At least I hadn’t spent $5,000.
I’m sponsoring the conference for the third time this year, and I will break even on it. But it’s not leading to any consulting work, which is the whole point. Last year I hosted 65 engineers representing different companies and got no overflow work.
In my third year of business, after lots of trial and error, I finally discovered that I get the best response from postcards. The people who receive these postcards take a quick look and decide whether to throw them away or keep them for future reference. My prospects don’t want to take the time to open a letter and read through several pages, only to find out they aren’t interested. To stimulate new business I send a marketing postcard to 1,500 contacts four times a year. This has yielded a response of about one-half of one percent.
If you know someone you trust in a similar business, pick his or her brain for ideas on bringing in new customers. I could have saved myself time and money by doing some research up front.
MISTAKE #7: COULDN’T TELL A
TIRE KICKER FROM A BUYER
I spent too much time and money on prospects who really had no intention of buying anything. You may be born with the instinct to determine who’s a real prospect and who’s not, but I wasn’t. I soon discovered that not every contact was a buyer. In fact, I learned that in my field people often take six months or a year to make a decision.
After making several out-of-stage trips, I began to ask prospects very pointed questions: Are you really serious? (Convince me.), When will you buy? Do you have the authority to sign a purchase requisition? (If not, then who does?), Is the money in the budget? What is your schedule for this project? You need to ask real questions to get real answers. A large company may have lots of money to spend in “probes”; a small business like mine can’t afford it.
MISTAKE #8: DIDN’T HAVE A FINANCIAL
When I left the large company I was working for, I received about $50,000 from my retirement fund. Some of this went to pay taxes; about $6,000 was used to pay off debts. But I put most of it into the start-up of my new business. I thought I had enough money to live forever. Wrong! Although I had attended many seminars (along with reading books and magazine articles) on how to start and run a business, I was not prepared. Initially I figured I’d need $2,500 a month out of my nest egg to live on, but that projection was worthless because I attracted no early business. My retirement money paid for day-to-day living expenses. My lack of planning was coming back to haunt me. By the time I landed by first consulting project, the retirement money was gone, and only new business would keep me from going under.
MISTAKE #9: MOVED OFFICE
OUT OF HOME
In my fourth year, I decided to move from a home office to commercial space. I wanted to run computer-training programs for engineers and didn’t think I had space at home. The overhead on the office was about $5,000 a year, and I never got my training programs going. Moving to the office took a leap of faith; I figured I’d gain in the end. But it didn’t turn out that way. The overhead and the 45-minute commute were a burden. After three years, I moved my office back home last month.
MISTAKE #10: LIVED OFF CREDIT CARDS
With too little work and too many expenses for the office and failed marketing efforts, I got into a disastrous habit of borrowing money to live–robbing Peter to pay Paul. Credit cards became my livelihood. Lack of proper planning, no marketing skills, and poor financial habits are the burdens that have kept me stuck in a morass of debt. I have remortgaged my house three times to pay off debts.
There is no one to blame but myself. In the beginning, I spent money foolishly in many areas. I took business trips that were not fruitful, overspent on insurance, mishandled tax money, and borrowed to go on vacations. In short, I bought things I didn’t need with money I didn’t have. I attempted to maintain the lifestyle I had been accustomed to, even when the money was not available.
I was not honest with my family or friends about my financial situation. Had I been truthful, perhaps the pressure I put on myself would have eased, and the truth may have set me free to be who I was–not who I wanted others to think I was.
MISTAKE #11: MANAGED TIME POORLY
Poor time management has caused me problems. The few times I did get two or more projects due at approximately the same time, I attempted to work around the clock to get the work done. As a result, I didn’t have enough time to check the work properly and often generated a poor report for the clients. My rationale was that I needed the money, so why pay someone to help me? Wrong again! I lost one client because of a foolish mistake that I don’t believe I would have made had I taken the time to check some simple calculations.
Now, I always take the time to recheck these same calculations. And, if two jobs come in together, I hire a part-time analyst to assist me with the most time-consuming tasks.
Hiring a helper also allows me the time to continue with my sales activities. It’s easy to let sales calls slip, either because you don’t want to make the calls or because you convince yourself that you don’t have the time. You must continually generate income. You must set aside time for these important sales activities. The heart of any company is its ability to generate sales. Don’t worry about too much business.
I’ve since learned to time-slice several projects and produce results much faster than any large corporate analysis group can. If a client comes to me on Friday afternoon and needs a job completed by Monday, I’ll get the job done, weekend or not.
MISTAKE #12: HAD NO BACKUP
FOR TOUGH TIMES
Lacking a business plan, I never had a backup to rely on if the business went sour. When your normal business starts to fall off, it’s important to have some other type of endeavor to help take up the slack. If you run a service business, is there a product or service you might be able to sell to supplement you income? Are you a writer? Think of these options before you start your new business.
One new area I’m now trying is retail software sales. I wrote two programs that I’m marketing on a small scale. One looks like it’s going to bomb, but the other may generate some sales. I wrote it because I needed a utility to type simple things (like addresses on envelopes), but I couldn’t find a product on the market. This little program has saved me a lot of time in my own business, so I expect any business would find the same time savings. Again, the problem is getting the word out to prospective buyers. My advertising budget is very small, so not much has happened yet; but with any luck, some money will roll in.
We tend to hear only the success stories. There are thousands of independent businesspeople like me struggling to make a living. Last year I made $30,000; the year before, $50,000. That’s not bad, but I’ve got overhead and debts to pay. And this year may be even worse than last year.
I’ve got a few irons in the fire. I’m negotiating with a big company to conduct inhouse computer training for engineers. I’m sponsoring another FEA conference. Maybe I will “make it” someday, maybe not. That depends on what making it means. To some it’s having money; to others, position–or it could be simply staying in business. For me, making it will mean being as successful as my father–out of debt and able to enjoy my golden years. You must define success before you start dreaming about a new business adventure.
Success can be measured in many ways, but the bottom line is making enough money to stay in business. After the money starts rolling in, you can afford to change your measure of success.
DAVID H. HUDSON runs dh Engineering, a mechanical-engineering consulting firm, from his home in Bloomfield, New York.
COPYRIGHT 1991 Freedom Technology Media Group
COPYRIGHT 2004 Gale Group