Pitfalls of the Small Business
April 4 2015
You did it! You've successfully shed the shackles of your former supervisor and are now the filing your paperwork with the State to register your business. You've officially joined the ranks of the small business owner.
When the excitement fades, however, the terror may set in. As the owner of a small business, you're primary concern is going to quickly become ensuring that your business survives its first year and thrives in its second. A recent study performed by Bradley University and University of Tennessee found that on average, 25% of all small businesses in the US will fail within their first year. Roughly half of this number, are due to incompetence issues; primarily no experience or knowledge regarding pricing, financing, record-keeping, taxes, and business planning. Having an idea is an incredible thing, and the driving force behind innovation and progress. Unfortunately, an idea won't make you any money if your business falls on its ass the first 12 months that it opens its doors! Here are the most common mistakes that most small businesses will make and how you can best overcome them to ensure your business' future.
Spending Too Much Too Early
The old saying goes you gotta spend money to make money. Unfortunately, too many businesses, every year take it too much to heart and apply for larger loans than their business needs or is capable of paying off that early in the game. They buy more equipment than demand for their product/service warrants and end up with a lot of business inefficiencies. These costs can be difficult to recoup early on when you're trying to establish yourself in your area.
In order to avoid over stretching your initial finances, analyze your area's market demand for your product and the competitors there that are already serving you potential customers. Starting your business on a shoe-string budget is often advised over frivolous spending, as a cautious approach can spell the difference between survival or tanking within your first year. Look for smaller loans from local banks, don't cut your company's ownership up excessively for private equity, and research what you really need in order to run a successful business in the first few months.
Expecting Profitability Too Early
You didn't start a business because you wanted to settle for a lower salary than you previously earned. The hard truth however is that in your first one-three years as your own boss, you'll be earning equal to or less than your salary from the job you just left. A risky mentality to subscribe to is believing that your idea or business will net you an obnoxious profit margin early on. Tech giants such as Facebook, Twitter, and Uber have changed the playing field for business owners and investors alike. Angel investors see diamonds in the rough when they look at risky start-ups and anyone with a good idea believes that profit margins as high as 50-60% are waiting just around the corner if they can find an office to set up a room full of computers. As the section above detailed, spending too much too early expecting to recoup your losses quickly will spell doom for your early life business. By also not reinvesting into your company for expansion, you are limiting your competitive potential and your future earnings. If you are intending to be in that corner office for the long run, a good rule of thumb is to accept your salary may be lower than average your first year, equal to it the second year, and if you've been successfully managing, above average on your third year.
Cashflow Crisis
You've been in business for a little while now. Your credit rating is outstanding and your spending like a madman on everything from surplus supplies because you got a great discount, to marketing materials that you won't need for a few months. If you've been saving your line of credit for when you "really need it" you'll soon find yourself completely strapped for cash from your overspending endeavors. Cashflow problems are one of the leading causes of failure in start-ups, because regardless of your projected/expected sales for the quarter, you can't pay rent, your employees, and your debts with debt. Balance your spending between open lines of credit (don't be afraid to spend a little bit on account, it exists for a reason) and your reserve lines of cash, but make sure that you do have enough cash left over in the event of an emergency. Spending very close to the chest can cause serious damage to your company's financial health if equipment breaks, a lawsuit happens, a supplier goes out of business, or any other number of unexpected events happens that causes you to have to reach deep in your pockets or apply for a new loan from the bank.
No Business Plan
You wouldn't try to drive from California to New York without a map and some sense of direction, yet countless small business owners and entrepreneurs every year do the equivalent with their businesses. A business plan is more than just a tedious document to write about your business, its a fluid compass that you will use to guide your business. Writing you business plan will help you create a goal in which you want to see your business towards. Having a clearly written business plan will help you in managing your cashflow well in advance and setting up a strategy for a high cash outflow and low cash inflow situation. By also creating a Business Plan, you are also creating concrete transparency for investors and banks if you are seeking external seed funding (if you can't clearly explain your business/concept to someone else on paper, nobody is going to be willing to risk funds to support you). Finally, your exit strategy may sound great in your head, but by writing in your company's defacto constitution, you'll have a barometer for when you believe your company has reached its desired peak of success.
Waiting til Tax Season to Think About Taxes
Managing a business is difficult. Owning and managing your business increases that stress ten-fold. When you're constantly worrying about staffing problems, missing revenues, paying rent on time, securing your first round of funding, and ignoring the calls from internet providers about installing a faster connection; its no wonder you've completely forgotten about getting your documents together for April 15th. As a business owner, you can write off a substantial amount of your own tax liabilities by signing them over to the business, but make sure you are keeping accurate records of all of your receipts, accounts, and revenues for your business throughout the year. Regardless of how good or bad your year was, the IRS will still be waiting for you in tax season, so make sure you are able to keep enough money leftover in reserve to pay off the taxman, otherwise you'll be risking significant penalties or other punishments from Uncle Sam.
Not Seeking Proper Advising
You're a manager, so unless you graduated Summa Cum Laude in Accounting, seeking professional guidance may be beneficial to your company. Having a full-time accountant in house is highly beneficial, as they'll consistently know what is happening with your company, and when you've reached a certain point of size and scope, you will need one. Until you've reached that point, seeking business consultation from a CPA or account professionals can greatly improve your bookkeeping, tax preparation, and ultimately even your bottom line. If you have also had no previous experience in setting the price of your product, knowing how much to borrow, and what your first year's expenses will be: seeking financial guidance may be the defining factor in how well your business is set for success.
Lack of a Financial Officer
Just because your company isn't international with over one hundred employees doesn't mean you don't need a corporate structure. Regardless of whether you currently have an accountant in house, you'll need a CFO or Interim Controller to balance the books, forecast anticipated revenues and expenses, protect the company's assets, and monitor the company's compliance with governmental regulations. If you are unable to hire an in-house CFO, CPA firms frequently offer Interim Controller Services.
Being in charge of your own company is one of the most stressful and rewarding experiences. But regardless of how anxious you may get, you always have access to expert financial advisors around you to help you carve out your legacy in the business world.
Get In Touch