Starting out in business, you have (at least) a million things to think about, and as many decisions to make. Sometimes a fear of making mistakes can just add to a new business owner’s stress. While there’s certainly no shame in mistakes — sometimes the best ideas or biggest ideas come from them — there are some common small business mistakes you’ll want to avoid, and we’ve rounded up 10 of ‘em. Let’s dive in.
#1: Getting into business without a business plan
Too many businesses start without a basic plan (and you know what they say about failing to plan!). Every new business should map out a business plan, because it’s not only your strategy for growth, but it also helps determine your financial needs. This is your GPS, and it will help you pilot your business as you grow.
#2: Getting into business debt without a repayment plan
Chances are, you’ve borrowed money from somewhere (or someone) to make your startup dreams come true. Paying back that debt — particularly if it was from friends or family or is on a high-interest credit card — should be your first priority. Build that repayment into your budget and the strategy into your overall plan so you don’t get sidetracked with shiny things when your business starts earning a profit.
#3: Overestimating how quickly you’ll earn a profit
It takes time to build a stable and consistently profitable business. One of the most important things you can do is identify your business’s break-even number — i.e., how much revenue your business needs to earn to cover expenses and not incur losses. Then, you’ll want to do a monthly break-even analysis to see how close you’re getting to that number. The average business doesn’t become profitable for two to three years, but it’s different for everyone. Be conservative in your estimation, build in a cushion for expenses, and plan on reinvesting almost all your profits while your business is starting out.
#4: Not establishing a good business emergency fund
Just as you have an emergency fund for your personal expenses, you should have one for your business expenses. It’s there to protect your business in the event of an emergency and should be able to cover three to six months’ worth of operating costs. Some call it capital reserves or retained earnings; either way, it’s basically a cushion that can help cover a major crisis, such as an illness, major staffing shortage, facing a lawsuit, or the like. This is another component of that all-important budget: storing reserves that would allow you to keep the doors open.
#5: Mixing personal and business funds
This is a common error for small business owners, especially sole proprietorships. It shouldn’t matter, as the money is all yours, right? The problem is, having your business and personal funds in one checking account can make for a nightmare at tax time as it’s nearly impossible to show profits and losses and take any applicable deductions. It’s also much more difficult to budget and track using a pooled account as your reference point. And as your business grows and you begin to seek further funding, business funds moving through personal accounts can really muddy the financial waters. Most business owners find having separate accounts less cumbersome than trying to track two purposes out of one, and a great banker can make getting moved into a business account pretty painless.
#6: Getting behind on bookkeeping
Bookkeeping probably doesn’t rate high on your list of favorite activities — in fact, it probably doesn’t make the list at all. But business owners lose money by not detecting errors or overpayment, and accurate record keeping will ensure that, come tax time, your tax return is correct and you’re not leaving money on the table. Stay on top of your invoices and create a clear audit trail as you do so. Take advantage of tools to help you, whether it’s bookkeeping software or services recommended by your business banker.
#7: Not planning for taxes
Taxes are going to happen whether you’re ready for them or not, so why not avoid tax time angst and plan for them? Factoring estimated taxes into your budget is a smart move if your business is earning a profit. If you’re not yet showing profitability, that’s all the more reason to plan, as you may be eligible for certain deductions.
#8: Not hiring a good accountant
A good accountant is indispensable. They’re your magic bullet when it comes to tax prep and filing, your consultant on tax codes, your payroll advisor, and your consultant on other financial matters as your business grows, in addition to preparing your annual financial statements and other crucial documents. The temptation might be to save a bit of money and DIY it (gasp) or go as cheap as you can, but don’t cut corners where the viability of your business is concerned. Ask other business owners for a recommendation, find one you like, and reap the benefits of their expertise.
#9: Not hiring a good attorney
Qualified, specialized professionals are a wise investment. A good business attorney will provide indispensable assistance in almost every aspect of your new business, from basic zoning compliance to ensuring your business is registered and structured the right way to contract reviews and trademark advice. And should you get into a dispute with a client or vendor, your business lawyer can represent you. Even if you register your business on your own, it’s good to have an attorney review and to begin to establish that relationship.
#10: Not having business insurance
This often seems like a luxury to a new business owner, but trust us, you really need business insurance. Should your business get vandalized or burglarized, or should an accident take place on your business property, insurance helps keep your business — and your other assets — intact (perhaps in conjunction with that business attorney we recommended). Inquire of your insurance agent, or see if they can recommend someone.
We hope you’ve found our tips helpful! There are lots of pitfalls that can befall a new business owner, but with the right people in your corner, you can set yourself up for long-term growth. Contact us if we can help pave the road to business success.
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