No business plan, insufficient capital, no accounting, or incorrectly set target group – these are only some of the many sins committed by rookie entrepreneurs. Unseasoned business owners have a tough nut to crack, especially at the early stage of their endeavors. What mistakes do you have to avoid and what should you pay particular attention to when launching your company?
Most common business mistakes
A significant share of our clients are programming companies at various stages of development. I’ve been devoting quite some of my time to providing them with advice. I’ve noticed that there are certain recurring business mistakes, so I decided to publish a post on the issue.
Despite the fact there isn’t a single, verified recipe for achieving success, there are indeed several common and dangerous mistakes you need to avoid if you’re an owner of a software house.
1. Insufficient competencies
One of the most frequent mistakes made by software house owners is the lack of managerial competencies.
Let’s say you’re a highly-trained specialist. You’ve reached the conclusion that instead of building someone else’s business, you’d prefer to paddle your own canoe. Or you’ve simply had enough of your boss and launched a rival company.
If any of the scenarios sound familiar, I recommend right away that you read “The E-Myth” by Michael Gerber. You’ll learn why most of the people launching small companies believe the said myth – a tragic premise that if you’re an expert in a certain domain, you’ll be able to successfully run your own company in the said niche.
In other words, you may be a competent, expert programmer, but that doesn’t mean you’ll be able to manage people. Coding knowledge doesn’t transfer to cost calculation, sales, marketing, etc.
2. No sales in the company’s structure
Our product sales itself, we’ll brush up the website and sell more projects – these are the arguments you’ll often hear from people managing software houses. They are a symptom of an absolute lack of knowledge on sales and business management.
Oftentimes, programmers launching their own companies are forced to face a drop-off in terms of salary. The reason usually being the said lack of sales knowledge. To prevent this from happening, one has to make sales a core part of the company’s DNA. Calculated sales are particularly important for a software house.
If you’ll make lead acquisition, CRM, and customer reachout a priority from the get-go, you have a good chance of avoiding issues with generating income from the early stage. Why’s that? Because sales is a part of your corporate culture. In the words of Eric Schmidt, the CEO at Google, sales-generated revenue solves all problems, and it’s tough to not agree with him.
“To sum it up – everything that’s not sales can be bought with what you sell. The same goes for SaaS-type businesses – sales wash away all the sins. That’s why you should keep it a priority from the early stage of planning your business and hire quality salespeople – write Eric Schmidt, CEO Google.”
3. Not minding your spendings
At software houses, around 60-90% of total costs are staff costs. With regards to all the other costs, employees and their salaries make up the lion’s share of everything. That’s why it’s an error to not manage contract policy properly – this is one of the most common business mistakes you need to avoid.
Contracts vs. work agreements
Let’s say you hire 10 developers. A single contract is a cost of 7k PLN gross. A work agreement is 9k PLN gross. If you put that into a yearly perspective, that’s 244k PLN of a difference!
The cost difference of hiring a person based on a contract vs. work agreement plays a tremendous role. Make sure you have this figured out when planning your business. You can still pay your employees well while trimming down intermediate costs. This is a two-way deal that may affect whether your software house turns or doesn’t turn a profit.
Company and employee priorities
Let me bring up a real-life example – certain software house used to have problems with turning out profit. The vibe around the company was rather tense, and the employees weren’t feeling secure at an unstable company. The management had an idea to buy fruits once a week and so boost the employees’ spirits.
Well, programmers earning a good buck, who can afford fruits, weren’t too enthusiastic about the idea, to put it mildly. That’s why you should talk to your team about what they find important. No dialogue involving company and employee priorities may lead to unnecessary frictions.
4. Risk and personal cost management
So, since you launched the company, your earnings have dropped. You’ve put all your savings into growing the business. No wonder you have low resistance to the temptation of acquiring fast cash, even if it’s linked to taking a risk. Sadly, it’s often the case, that the risk is disproportionate to the cost.
Here’s another situation I want you to imagine (or maybe you’ve actually already experienced this). A client approaches you with an irresistible offer – he wants to pay you $1 mln within the next 6 months and hire half of your resources at an attractive hourly wage.
How could you say ‘no’ to that, right?
It’s just as hard to agree and negotiate such contract terms, that will make the deal safe for your company’s liquidity in case of a failure. If you own a small software house and ca. 60% of the costs are salaries, then by getting involved in such a deal, you make your solvency dependant on a single contractor. This is very risky.
That’s why you shouldn’t have a single client who constitutes more than 30% of your entire revenue. Now, going back to your salary drop-off, it’d be hard to leave $1 mln on the table when your wallet is getting thinner. When launching your business, plan its budget thoroughly. Bootstrap yourself and don’t spend all your savings, which can leave you in a tight spot. Operate wisely.
5. No business specialization
Are you accepting any order just to keep yourself financially afloat, instead of focusing on things you’re really good at, spreading your team thin? Bad move.
Every up and coming company should specialize. Do what you’re exceptionally good at. For instance, you got your first project from an online store or a travel agency. The next good step would be an order from another e-commerce entity or a travel-related business.
Specialization will help you position yourself as an expert in a given domain.
You can specialize in terms of the industry, optimizing the conversion funnel, or a particular client type. What’s important is building up your expertness.
6. Not caring about the customer’s business results
Even the most well-written app, which isn’t helping your customer achieve his business goals, is a failure. You can try and object to this, but that’s how things are from the business standpoint.
Now, from the whole to the part – software houses sell two things: revenue and costs. You either develop an app or work on a project that’s supposed to increase the customer’s revenue, for instance, by coming up with an algorithm that speeds up the system, which in turn boosts efficiency and thus generates more income, or you offer software that automates human work, which allows for trimming down of staff-related costs.
The sin committed by many software companies is thinking that what’s most important is the quality of code or scalability of the app. Newsflash – the most important thing always is the customer’s business objective.
Not keeping it at the back of your head is a mistake because results matter in business. The more results you deliver, the better your image is in the niche.
Not everything will always go as planned
Dwight D. Eisenhower, a former US president, has once said:
“Plans are worthless, but planning is everything.”
Regardless of how meticulous your business growth plans are, you have to be fully aware of how little of these plans you’re actually going to execute. Business isn’t about being the smartest, though, but being the least stupid.
That said, gear up well for running your own company – plan its budget, develop a business plan, figure out the company structure. All this will help you avoid some of the most common mistakes and not have to put out fire every day. At the same time, you need to realize that blunders happen anyway, because you can never plan everything in business.
