Warren Buffet maintains that some of his greatest lessons came from his greatest failures. We all make mistakes and I hope that by sharing some of mine, I’ll become more tolerant of others’ mistakes and, hopefully, not make the same mistakes in the future. I believe it’s when we experience pain through our struggles that we tend to grow the most.
The following are five mistakes I made that led to the downfall of my business.
Poor inventory management
One thing I had to learn the hard way is that small errors repeated over an extended period of time can and will create a crisis. My first error was poor inventory management. My company never had a good inventory system in place and rather than correct the errors and perform a routine physical inventory and reconciliation, I ignored them and failed to execute a process to correct and improve them. I learned that failing to develop a system to track and measure the flow of inventory through the sales and purchase process can be costly—even fatal.
Too many accounts receivable
What started as a few thousand dollars annually grew into over $200,000 our final year in business, which led to quite a crisis as we completed our reports for the bank. My small business should have acted more like Wal-Mart—having customers pay as they checked out. Why I felt I needed to extend terms and become the bank for other businesses still baffles me today. I guess it was my sense of wanting to please everyone, be the nice guy or just ignorance, but, regardless, it was a huge mistake. Often I would decide—out of fear of losing a deal or customer—to extend terms to keep them happy or get the deal completed. My company was under capitalized and struggling, yet I would borrow money to buy inventory and then extend credit to unworthy customers, both of which ate away at my profits. It was a cash flow nightmare with many sleepless nights and needless stress.
Failing to have a well-defined credit checking process resulted in bad debt and small amounts that quickly grew out of control. Not to mention the other options that many lenders offered me in the midst of the crisis. My boat was sinking and they threw me lead weights like accounts receivable factoring, or credit card factoring, all at high rates, which affected the bottom line and contributed to the business’ failure.
No cash flow management and budget
A business with improper cash flow and controls in place can sell itself out of business in a few years or less. Mine took six years to unravel. With no budget, I was able to spend money with little or no oversight and no accountability. The lack of a budget also affected capital reserves and large expenditures. Without a clear budget, it was easy to put off saving and building a nest egg of cash. This jeopardized my future financial security and that of my family.
Poor hiring choices
Every business should have a well-defined process for hiring. Mine didn’t and it proved costly. I hired based on my feelings, which turned out to be a huge mistake. At times, my passion for helping others stood in the way of common sense. It became a thorn in my side. I made several bad hiring decisions because I lacked an actual hiring system.
Instead, I hired just to have a warm body and fill the office space. I hired my competitors’ rejects and built a sales staff with them. My thinking was that they were already trained and they may even bring a customer or two with them. But what I failed to realize is that if they couldn’t make it with the competition, why on earth would I believe they would achieve success at my company?
I also failed to perform background checks, I didn’t solicit assessments and I didn’t call references. But my greatest hiring mistakes were centered in two areas. First, I hired a financial bookkeeper but failed to give her the authority she needed to manage our business finances and rein me in on my spending. Second, I gave new hires too much freedom. In one instance, I hired a new salesman, helped him buy a house and obtain a work visa. He then embezzled $212,000.
Failing to listen to mentors
All of this could’ve been avoided if I had listened to trusted advisors, including a mentor whom I have known for almost 19 years, my wife of 14 years, and a small group of CEOs I had been meeting with for about 10 years. Bad decisions and losses could’ve been minimized if I had applied the advice that was presented to me so many times. I should’ve listened to the wisdom from those people whom I had asked to help guide me. But I was very stubborn and set on a path of destruction—I had let my pride and ego run wild. What’s more, I felt my advisors really did not understand what I was doing.
After all, I felt my business was different than their businesses and that my wife—despite being an accountant—didn’t understand my business. Many times, my mentor and even my wife would advise against a business decision, yet I would make the wrong decision anyway. Somehow I also neglected the advice of a peer group of CEOs that had a combined experience of over 200 years. It was rather ignorant of me to have years of wisdom at my disposal and yet fail to use it in a way that would benefit my business. In dollars and cents, these errors amounted to roughly $600,000 in losses.
In the end, I learned to draw from others and apply the wisdom of the ages. With the additional assistance of books and educational resources, I became determined to end the chaos and charter a new vessel. I now listen to my mentor and business advisors and understand deeply the pain and cost of not doing just that.
I also understand the value of having mentors in my life and using them in a constructive way to benefit my business and my family. I’ve learned how not to let my strengths become weaknesses; to be compassionate and help people without giving away everything; and to find ways to serve others for the common good of all.
Currently, I’m the President of ELC Roundtable, a peer-to-peer group for entrepreneurs, leaders and CEOs whose mission is: “Members helping members to be successful in business and life.” I spend most of my days listening to other CEOs and guiding them through their day-today struggles. We work together to find solutions to problems and rejoice in the successes. I have taken some of my greatest business failures and converted them to some of my greatest lessons in life. I believe that by sharing the pain and struggles I experienced, I can help them avoid the same mistakes.
In addition to understanding what my mistakes meant for my future success, my faith in the Lord also helped me find my way. One verse that has become my favorite is from Romans 8:28 that says: “And we know that in all things God works for the good of those who love him, who have been called according to his purpose.” This verse has contributed to my optimistic approach to life and the business challenges that we all face.
I also value a saying from Dwight D. Eisenhower who said: “Neither a wise man nor a brave man lies down on the tracks of history to wait for the train of the future to run over him.”
Though your past mistakes can be painful and create negative thoughts and emotions, they can also make you stronger if you open yourself to learning from them.
Small errors repeated can also cost money along with the crisis that it causes. Thank you for sharing all of these things to be aware of when striving for a successful business.
I agree with McKenzie that small errors can cost money along with the crisis that it causes. All points are important to take care during business losses that you have mentioned. Thanks for sharing all details with us 🙂
Yes,I think that too much account receivables will definitely cause the business to fail. I believe that in order to have a good cashflow, business owners must always collect their receivables on time. Thanks for sharing this article.