There is a temptation for many start-up businesses to cut corners and spend all of their money on inventory. After all, it is the stock that sells, which brings in the money. Indeed, many new businesses think that their lack of overhead is an advantage. They cut margins and attempt to compete with established businesses.
A couple of years ago, I opened a second shop in an indoor market in a nearby seaside town here in England. The indoor market had huge footfall. The summertime sales potential was high. My idea was that I could buy greater amounts of stock, negotiate bigger discounts, and use the unsold stock during Christmas in my online store.
Whilst on paper it seemed like a good idea, and whilst I broke even, I failed to take into account the cut-corners factor. Many of the other businesses in the building did not carry any insurance, did not have a cash register (and presumably did not pay all their taxes), and did not think twice about rubbishing competitors.
One business in particular, located in a better position, copied our stock, found out our suppliers, and undercut us in every way it could. That business even launched online — selling on Ebay and Amazon — having seen our success.
The owners were basically indoor market traders. They carried on their corner-cutting ways. They rented a back room in the market to store their ever-growing stock. They split and re-split their business, artificially, to remain below the small business threshold to avoid charging sales tax. (In the U.K., any business selling under $100,000 a year, roughly, does not have to charge sales tax.) And they continued to not bother with insuring their stock.
Their tactics worked. After one season, I moved out. My online sales continued to be hurt by their tactics, however. So I changed direction, altering considerably what we stocked. Meanwhile, their businesses grew. I could see their sales undercutting other established businesses.
Two days ago all that changed. In another part of the indoor market, an ice cream machine had an electrical fault. Perhaps the ice cream machine was from another market trader who was also cutting corners and not getting regular checks on its appliances. Regardless, the building caught fire one night. Although no one was hurt, the building burnt to the ground. The next day there was a picture of my former competitor in the newspaper, saying he had lost everything. He said he had over $200,000 of stock, all destroyed, none of it insured.
I should feel sympathy for this owner, but I cannot. By cheating and cutting corners, he was slowly destroying other businesses. Fate, however, stepped in and destroyed his business overnight.
Corners should never be cut. Insurance, electrical safety checks, and other boring items are not needless expenses. Big businesses know this. They would not waste their money on these things if they did not realize how essential they are. The biggest danger facing a new business is not recognizing this and not spending the money accordingly.
Another frequently overlooked expense is customer service. When online businesses grow over a certain size, more than a few orders a day, they need a dedicated customer service employee, perhaps for only a few hours a day at first. New business owners may mistakenly view this as hurting the bottom line. To be sure, dealing with post-sales problems can be tedious. Some customers are never satisfied. But any business that does not respond to a customer within a few hours will likely harm future sales in some way. Reputation is a hazy thing that, once lost, is almost impossible to get back.
There are many other expenses that are essential to a successful business. They likely differ among businesses. But whether they are antivirus software, fiber optic broadband, a proper padlock on the gate, or any of a hundred different things, avoiding them may seem prudent at first.
But fate has a way of coming back and biting you. If you want to have a successful business in the long term, do not cut corners.