Category Archives: Business Mistakes

Horror Story of Small Business Fraud

Business Mistakes, Business Stories, True Stories

If you’re a business owner, and especially if you’re in the expert business, you should know this small business fraud story. It involves a very sophisticated scheme, including a fraudulent cashier’s check, and a very well faked charity, that would have fooled me.

This could happen to me or to you

Click on the image for the podcast

Melinda Emerson, a good friend, tells the story herself in her SmallBizChat podcast from earlier this month.

That it fooled Melinda is very impressive. She is as knowledgeable and sophisticated about small business ownership as anybody I know. She is best-selling author of small business advice, and true small business expert. She’s on the web, and in social media, as Small Biz Lady.

A fake cashier’s check?

What would you do? You have a cashier’s check that arrived via Fedex overnight. You took it to your bank and the bank cashed it. So you spend a part of it, as agreed with the sender.

A cashier’s check is like cash, right? An automatic assurance? That’s Melinda thought, and what I thought too. But no.

The bank took the cashier’s check and put the money into Melinda’s account. She’s a longstanding trusted client. And then she donated part of it to a fake charity. Why not? After all, a cashier’s check is like cash, right?

A week passed. Then it turned out that the cashier’s check was fraudulent. The bank took that money back. And meanwhile, Melinda’s donation disappeared into a fake charity out of the country. The bank apologized as it docked her account the amount of the cashier’s check. But what Melinda spent as quid pro quo charity donation had already disappeared. So she was plain out of luck. And out of a lot of money too.

They are targeting experts

It’s a very sophisticated small business fraud. It involves people in three countries, a fake cashier’s check, a fake charity, and several websites and related materials, all fake. Melinda of course reported it to the FBI and is now cooperating with an investigation that includes other victims, apparently many of them are experts, like Melinda, who write books, give webinars, post on blogs.

But they could be coming after you next. Expert or not. So be aware.

The Best Place to Start Your Business …

Business Mistakes, Entrepreneurship, Starting a Business

… is where you are. Sure, there are exceptions. Maybe you’re young, and have no roots. Or maybe you just want to move to somewhere else. But, barring special cases, look around you. The best place to start you business is where you are.

In my email and on Quora I get a steady stream of questions about moving first to start a business. Today, specifically: “If LA is so expensive, why do people start a business there?”

And also today, what is the best country to start a business...?

To be fair, this may be a flaw in Quora, a question-and-answer site I frequent. They started paying people to ask questions that generate answers.

However, it’s also something that’s been coming up off and on for the four decades I’ve been involved with startups. Should I move to Silicon Valley? What are the best startup hubs? Is New York city a good place?

Myth and misunderstanding

What bugs me is that — at least in the US — the idea of the best location, or a better location, is so much myth and misunderstanding. The best place to start your business is where you already are. That’s where you have a home, roots, contacts, vendors, and a sense of local market.

And furthermore, in the US, the Internet is everywhere. Phones, couriers, libraries and airports are everywhere. While there may be more investors in California and Washington than in Idaho and South Dakota, the off-the-hub startups get investment too, when they are good investments. A few years ago I met two young entrepreneurs located in the woods about an hour from Talkeetna, Alaska. They’d go months unable to reach even Talkeetna, which is a very small town, four hours from Anchorage. The two of them were running several websites and making tens of thousands of dollars monthly.

I can think of three general exceptions:

  • Maybe you’re young, left home for college, and want to start your life somewhere else, a new home, not where you grew up. The catch here is that young people are the exception in startups. Research shows that the vast majority of successful startup founders are in their 30s or 40s.
  • Maybe you aren’t young, but you do want to move. I get that. My wife and I moved from Mexico City to Palo Alto in our 30s, and from there to Eugene OR in our 40s. There’s nothing wrong with that. But that’s not moving because your location is better for business.
  • Maybe you are in an exceptionally bad location. Generally the urban vs. rural trade-offs work reasonably well, but if you’re hours from an airport, or can’t get good broadband, then maybe your location is a disadvantage for your startup.

Otherwise, the best place to start a business is where you already are.

Think it through… have you ever moved?

Moving is a royal pain in the rear. It’s very hard to find a new place to live, home or apartment, especially from long distance. When you get there, you suddenly have to find a new bank, new restaurants, new stores, new organizations, new people. Nobody knows you. Your social structure is back to zero. Your business contacts, locally, are back to zero. It’s hard.

Starting a new business is also really hard. Doing it in an entirely new place makes it a lot harder.

The obvious conclusion

The best place to start a business is where you already are.

10 Business Plan Myths That Hurt Your Business

Business Mistakes, business plan,

The need for good business planning is as strong as ever, and the potential benefits are as important as ever. Every business owner ought to have a business plan. But the best strategies for business planning are different than they used to be. And these 10 pervasive business plan myths get in the way, much too often.

This post includes the 8 business plan myths that I listed on my March 2 post on the SBA Industry Word blog, plus two others that weren’t included.

Why does it matter? Because business planning, done right, is a management tool that can help you steer your business.

1. A business plan has to be long (false)

Not necessarily so. A business plan can take whatever form is most useful, even if that’s just a few lists and tables.

2. A business plan is hard to make (false)

It doesn’t have to be. List your key strategy points and key tactics, and a few important major milestones (like deadlines, tasks, the new launch or new website, and necessary hires). Include projected sales, costs, expenses, and cash flow. Voila! You have a business plan.

3. Nobody creates business plans anymore (false)

Well-run businesses use business planning the right way. They keep a simple, lean plan up-to-date and refreshed. The review and revise it monthly. In straw polls I’ve taken for years at management workshops, the best 20% or 30% of the companies represented have a management process that includes a lean business plan as well as regular reviews and revisions.

Smart startups use basic business planning to help them see starting costs, projected early sales and spending, cash flow, and key strategy points and milestones before they launch. Then, they review these monthly.

4. Business plans are for only startups (false)

True, well-run startups generally use business planning to help figure out which steps they need to take, and which resources they need. But that doesn’t mean mature businesses can’t use business planning to constantly set milestones, strategy reminders, and forecasts. Mature businesses keep a business plan up-to-date, and review and refresh it often. The more a business grows, the more it can benefit from good business planning.

5. You can’t plan because change comes too fast (false)

In the real world, a good business plan manages change. It isn’t voided by change. You keep the plan current by making revisions as real events unfold.

It’s like dribbling in basketball: if you plan to go a certain direction, and the other team blocks you, then you go a different way. Having a plan means that you’ll have the information you need to make quicker, easier, and more natural revisions.

6. Forecasts are useless (false)

Forecasts are almost never accurate. But having a forecast gives you a tool to instantly compare what you expected to what actually happened (we call that plan vs. actual analysis, or variance analysis). Then you make business decisions to adopt to change.

Are sales better than expected? Then you look at the causes, and adjust marketing and other expenses to take advantage. Not what you expected? Use your plan vs. actual analysis to make the best changes.

7.   Having a plan means you have to follow it (false)

There is no virtue whatsoever in just sticking to a plan because you have a plan. It has to make business sense. Good business planning is about a bare-bones plan and tracking with review and revision to make it useful.

When things change, your plan changes. The benefit is in the tracking and information that serves like a dashboard, helping you manage the change and make adjustments.

8. All business plans need market research (false)

I read and review lots of business plans from mature businesses that don’t include fancy market research. Business owners have to know their market, and taking a step back to review your market is a good idea. But with good planning process in a business, you can stay on top of your market. You don’t need to include market research in every version of your business plan.

Only in special cases will you need market research to prove your market to outsiders. For example, startups looking for investment, or businesses applying for loans, might need market research. Mature businesses know their market and plan without the research requirement.

9. Investors don’t read business plans (only half true)

I was in an angel investment group for eight years. We didn’t read business plans for all the proposals that came in. We rejected many on the basis of summaries alone. For those that interested us, we invited them to present their pitch decks. From there, we narrowed the list down further.

For those that remained, the business plan was a vital part of due diligence. And for all of them, they should have had their bare-bones business plans made before they wrote their summaries and pitch decks. Without the business plan, the pitch and the summary are like movies made without scripts. Ultimately, seeking investors without a plan doesn’t work.

10. Nobody needs a business plan

Does every business need a plan, strictly speaking? No. But every business would benefit from good business planning.

People, even experts, still say nobody needs a business plan, but only because they are locked into the decades-old mentality of the big business plan document. If we redefine the business plan the way it should be, as a flexible record of key strategy points, tactics, milestones, and essential numbers, then all those experts would agree with me – that every business deserves a business plan.

True Story: Missing Assets Equal to A Year’s Sales

Business Mistakes, Business Stories

You don’t think finance and accounting matter in small business? Here’s a true story, and it’s about a small business like the ones I write about, in fact one I was involved in, not a large publicly traded company. $3 million worth of assets went missing, but nobody took them. Where do you think they went? Let’s hope this accounting nightmare doesn’t come up in your business.

This really happened

I know, that seems like standard large-company stock market stuff, but here’s a true story of Creative Strategies International, which was then a medium-sized high-tech research and consulting company owned by Business International and based in San Jose, CA. Call it CSI. I should add that this story preceded the change in ownership to the Creative Strategies that is now the brainchild of Tim Bajarin, still exists, and is still in San Jose, CA.

I need to emphasize this, because I like Tim Bajarin and he’s done a great job with the company since he took it over. I’m pretty sure the corporate entity even changed, I know the ownership changed, so I assume there’s no harm in telling an old story. And I think there might be a lesson here.

Shortly after I started to work there, the New York parent company audieted. And, as you suspect from reading the title of this post, assets were missing. In fact, quite a sizable chunk of assets. In a company of 20 or so employees, selling $4 million or so per year, roughly $3 million worth of assets had disappeared.

Needless to say, the parent company was not amused. But there was no theft, no embezzlement, just bad accounting.

What do you think happened? Of course you have no idea, but let me give you a hint first, then think about it. The assets were accumulated research, not chairs or tables or computers or gold bullion, but research. Does that tell you the answer?

Don’t Book Expenses as Assets

It turned out that CSI created what we called group studies, research studies that we’d design to cover some interesting new market in high tech, develop, finish, and then sell to multiple buyers. For example, a study in telecommunications would be created and developed and sold to 10 or 20 or more companies in the telecommunications markets. If you could sell a study that cost $25,000 to 20 companies for $5,000 each, they got a good study — market forecasts, competitive analysis, etc. — at a great price, and CSI made a healthy profit. Whoknows_istock_000000551118small

So have you figured this out? As the studies were created and developed, consultants were paid real money to research markets. They took real checks home and cashed them and paid mortgages and things. They also took planes to places and interviewed people, and purchased some secondary research, sometimes developed primary research, all of which cost money.

All of this spending should have been expensed as product development expense. It was just like computer programming in terms of tax treatment and standard accounting. You aren’t really building an asset, you’re incurring an expense. Product development is almost always an expense, even though it sometimes generates technology that goes into products that get sold for money.

Somebody doing the numbers assumed that since this would be cost of sales when the studies were finished and sold, and instead of calling this money development expense and subtracting it from profits, they’d call it assets, as if it were inventory, and subtract it from profits as direct costs.

It may have seemed logical at the time, but over time many of those group studies were started but not sold. If the sales were disappointing, instead of spending the full $25,000 and finishing the study when only two clients signed up for $5,000 each, they’d just dump the project.

And there’s the rub: nobody went back to those supposed assets, the accumulated investment in product, and wrote it off. It remained on the books as assets, for several years, until the parent company audited. Nobody had purposely or intentionally done anything wrong, there was no fraud, no charges, no money recovered; just several very unhappy people.

Business Numbers Matter

I guess I’m some kind of weirdo, particularly as I was a literature major and journalist-writer before I got into business, but I like the business numbers and I think they’re important. Maybe it’s from stories like this one. No, I wasn’t the accountant, I was one of the researchers, but I was also a vice president and those were bad times for all of us, not just the bookkeeper.

5 Simple Rules for Better Business Decisions

Business Mistakes, Growing a Business

Yes No MaybeThey teach decision sciences in business schools. Those of us doing business, either as entrepreneurs, business owners, or careerists, talk a lot, and think a lot, about business decisions. We all want better business decisions. I’ve taken some of those courses and heard a lot of the talk, and I’ve survived running my own business for a lot of years. Here are five tips I’ve come up with.

1. Know when time isn’t money … it’s information.

Don’t get pressured into fast decisions. Decisiveness is not just deciding fast; it’s deciding well.

Step back and think. If there is more information coming, and no penalty for waiting, then wait. More information is better. You may have little penalty for waiting, and more information available to you. For example, wait until you land the contract before you change the website. Wait for more sales to clear the pipeline before changing the messaging.

2. Live comfortably with uncertainty

No amount of data and research can completely eliminate the doubt about what’s going to happen. Don’t expect to know for sure, ever, when it’s about what will happen, as opposed to what did happen. Almost all of forecasting is using the past, or sample data, to predict the future. Get used to it.

Work for the educated guess. Make your guesses as educated as you possibly can. Yes, do the research; but don’t just believe the conclusion. Don’t just go by the proverbial seat of your pants or gut, without tempering that with information. But don’t ignore your gut either. Consider alternatives.

3. The crucial difference between wishy-washy and insightful

Smart people change their minds. Thoughtful people change their minds. What’s supposed to happen is that new information prompts new thinking, and what you had thought before might be revised by what you know now.

Never assume that what has always been true is still true. Never assume that what has never worked in the past won’t work now.

4. Use your whole brain

The whole left brain vs. right brain theme is probably a myth, according to the research that turns up with a simple web search. We all use both kinds of process, the gut (or heart, or intuition) and the rational (or logical, or mathematical). But some of us purposely try to block one or the other side as we look at decision making for business. For every go-with-the-gut” suggestion there’s somebody else saying let’s go with the data, or the research.

Use both. Respect both. Let the data temper your gut. Use the “let’s sleep on it” method sometimes. Let the decision percolate, or simmer. Write it out, think, dream, meditate, and see what your brain says.

Be  careful not to let the data or the research do the decision on its own, when it doesn’t check with your intuition. It takes people to make good decisions, incorporating both research and experience.

I’ve encountered several times the delightful phenomenon of people mapping decisions with spreadsheets, trying to make it all math and logic … and then skewing the results with intuitive inputs to the spreadsheet variables.

5. Give up on democracy

Remember the old adage that when committees choose colors, every wall ends up beige. In the early days of a startup, everybody shares decisions. As a business grows, it develops functional expertise. Good decisions aren’t made by committee. Let the marketing people decide the colors for the packaging, and the finance people decide how to fund working capital. And the owner, ultimately, has to decide strategy. Consensus is comfortable in the beginning, but doesn’t work on the long term.

Startup Culture is as Leaders Do

Business Mistakes, Starting a Business,

The question over on Quora was How should a new startup develop and sustain a strong company culture? I decided not to answer the essential how-to, but rather to share my experience in this area, which is more like a reality check on startup culture than anything else.  The following is straight from my Quora answer.

Culture is not what you say

Culture isn’t what anybody says, it’s what the leaders do. You can write mottos and pin poster on the wall, send memos around, write mission statements and mantras, develop tag lines, and repeat seemingly meaningful phrases at meetings … but what determines the culture is what leadership values – not what it says it values, either, but what it actually values with actions, policies, decisions, priorities, rewards, praise and everything else that happens all day every day.

Leaders, as people, rarely change who they really are. They will nurture new ideas or not, listen or not, treat their people fairly or not, depending on their values, their past, and who they are. Sometimes people can change over time, but that’s rare.

Leaders frequently believe their words and ignore or fail to realize that their actions contradict their words. This is why businesses are so full of hype and spin and meaningless drivel in mission statements and the like. Have you ever seen a company that doesn’t say they believe customer service (for example) is extremely important? But how many flow that thought into actual policies and performance. Similarly, is there any business that doesn’t say it values innovation? But how many businesses actually reward people for questioning authority or trying to do things differently? These are big-company examples everybody knows, but I use them to make a point about startups.

What’s a strong culture?

And your question itself offers an implicit example in itself. You say “strong culture.” What’s that? One leader could say a strong culture is when people compete with each other constantly, spend infinite hours in the office, and value stress. The next could say strong culture is one that develops a mission to make the world a better place, treats everybody fairly, and cares about its customers. Which is strong?

What matters is who you are and what you do, not who you want to be, or what you say you believe.

 

Build Yourself a Compatible Goals Filter

Advice, Business Mistakes, ,

Suggestion: on any kind of business relationship, take a step back, open your eyes, and look for compatible goals.

For example, one variety of hell is a startup with founders and investors having different goals. Differences on how to achieve goals are hard enough. You can talk out those differences. But when investors want one thing, and founders something else entirely, there’s trouble brewing. Companies can aim for growth, profits, or cash flow independence. Everybody involved should agree.

Use the framework of compatible goals to look at small business team members and compensation. That can be as simple as targets for gross margin (price less direct cost) instead of just sales. Years ago I hired an honest, ambitious, hard-working salesman with a compensation package tied to sales. He hit the sales targets by pricing deals so close to below cost that we didn’t have enough money to cover overhead. That was my fault, not his.

Use creative compensation schemes and bonuses. How can you make the goals of the customer service people compatible with the overall company goals? What do you do about targets, metrics, and bonuses? What about product development, as in programming? Editing? The more thought to compatible goals, the more likely to succeed.

You should also use the framework of compatible goals to look at business alliances. Do you want the same thing as those people from the other company? Can you both find a win? Are your goals for this deal compatible with theirs? Asking deeper questions about goals can lead to better, more useful negotiations.

Beware of the Myth of Persistence

Business Mistakes, Entrepreneurship, Starting a Business

I worry a lot about the myth of persistence. Persistence won’t necessarily make your business successful unless a lot of other things are also right. And persistence alone can turn failure into disaster. But still, people who should know better—people who succeeded—still talk about it all the time.

brick wall

There’s a logical trick to it. Almost everybody who made it through hard times while building a business can credit persistence because they stuck through it, and, eventually, made it. But what we forget or ignore is all those people who didn’t make it, persisted, and still went under, losing more money, and sometimes even important relationships, and people they care about, because they persisted.

Persistence is only relevant if the rest of it is right. There’s no virtue to persistence when it means running your head into walls forever. Before you worry about persistence, that startup has to have some real value to offer, something that people want to buy, something they want or need. And it has to get the offer to enough people. It has to survive competition. It has to know when to stick to consistency, and when to pivot.

So persistence is simply what’s left over when all the other reasons for failure have been ruled out. Those successful entrepreneurs who talk about their experience? They’re not lying. They look back on it, and it was persistence that saw them through. Because every startup is a lot of work, a lot of mistakes, a lot of failures. So a lot of startups that might have made it otherwise fail because it’s just too damn hard to stay with it.

This is one of several phenomena related to the problem of survivor bias. We hear way more from people who made it, and not nearly enough from the people who didn’t.

And then, if everything else is right, persistence matters.

How Can I Get Startup Funding Without Giving Away Half the Company?

Angel investment, Business Mistakes, Starting a Business

I’m surprised how often I get asked the question in the title, or variations of it, from people in startups. And you will hear discussions in which experts recommend ways to get investors who take less equity and demand less control. That seems short-sighted or worse.  I posted here years ago dumb investors is a dumb idea. But this question keeps coming up.A Bad Idea

If you’re working on a startup, understand the tradeoffs. Don’t try to find investors who don’t take ownership. Asking that question is like asking “how can I get somebody to spend their money without giving them anything?”

Ask yourself why somebody, anybody, would spend their money to build your business instead of to build their own, buy a house, car, or go on vacation? What do they get out of that? They aren’t the government. They can spend their money any way they like. So what – besides a share in ownership – can you give them for their money?

“Giving away” is the wrong way to say it. You share, in return for money; and, if you do it right, help, contacts, and collaboration (if you find the right investors). It’s like a marriage.

How much ownership your investors get is a matter of agreeing on how much your business is worth, and then dividing how much money you get into that. For example, if you can convince your investors that your business is worth $1 million, and they spend $500K, then yes, in that case, you gave up half. And it’s not that easy, either. If investors aren’t convinced you have a good team, good product-market fit, scalability, defensibility, and a reasonable chance at exit, then don’t worry about what you share with them, because they won’t want any part of it, for any amount of shared ownership.

If you worry about giving up ownership, that’s valid, but instead of complaining about investors, look up Bootstrapping here on this blog. Most startups bootstrap because few have what it takes to attract investors. It’s harder, but if you make it, then you own it all yourself. Or, if you have a startup that needs more money than you have, and offers a good business opportunity for that money, then think of investors as partners and find investors you can work with, and respect. Or bootstrap.

This question came up again on Quora over the weekend. If you’d like some alternative answers, here’s the link: How can I get funding for my startup without forfeiting half my ownership in the business?

(Image: Flickr cc, by snail_race)

My Fish Bowl Story of Marketing Mistakes

Business Mistakes, Marketing

Here’s a mistake I made that taught me a lot and helped me teach others.

The Mistake

OLYMPUS DIGITAL CAMERA

Many years ago, I took a new product – early business planning software – to its first trade show. We did the standard booth thing, brought along products, and sell sheets, business cards, and so forth. And we put a plastic fishbowl on top of our main table, in front of a large sign that said “Free Drawing. Drop your business card here for a free business planning software.”

Each of the three days, at the end of the day, we drew a card from the bowl. Later we sent the winners their software. And when the trade show was done, we ended up with four fishbowls full of business cards; in fact we had more than 500 cards.

And those cards were completely useless to us. The people who left them weren’t really leads for us. They didn’t actually want business planning software. They had brought cards to the trade show and they dropped those cards into every box, hat, or bowl that offered them something free. The leads were way more expensive to follow up than what they yielded in sales when we did. Thank heavens we had the sense to test a few dozen first, before we went to the expense of getting them all typed into an accessible list.

The Correction

The following year we took the same product to the same trade show and the same fish bowl too. That second year, however, we put a sign by the bowl that said: “For more information about Business Plan Pro, drop your business card here.”

After that trade show we ended up with a few dozen good leads – dozens, not hundreds. Those people were actually interested in what we were selling. Calling them back was worth the effort.

The Lesson

I’ve used this story often in teaching and seminars and managing my own company because to me it illustrates the importance of target marketing and focus. In this example, quality of leads is much more important than quantity. Hundreds of bad leads are worth nothing, while a few dozen good leads have real value.

What distinguishes the good leads from the bad leads is their interest. People walking the aisles at a trade show drop their business cards in any fish bowl offering something free, whether they are interested or not in what that exhibitor is selling. We didn’t want a lot of cards. We wanted cards from people interested in our specific product, business planning software, and not cards from anybody (via lucica at dress head).  The marketing follow-up was expensive , whether it was inputting data from business cards or mailing information, and the marketing yield was good with well-targeted prospects and bad with generalized prospects.

Some businesses depend more on targeting than others. Think about that for your business. Do you sell to everybody? Or do you sell to a specialized group? What kind of fishbowl do you want?