Small businesses are the backbone of the American economy. According to the U.S. Small Business Administration, they make up 99.9 percent of all businesses in America and employ 47.3 percent of the workforce. Yet, it’s incredibly challenging to be a small business owner. The financial pressure is enormous, and rules and regulations can make it hard for new businesses to thrive without deep-pocketed investors. If you own or plan to launch a new business, try and avoid these five common mistakes.
Numbers aren’t everybody’s strong point, especially when it comes to accounting. It’s also not as exciting as being out in the field or executing other managerial tasks. Nonetheless, accounting is essential and needs to be a priority for any business owner.
Even if you have an accountant, the onus is still on you to make sure everything is in check. Not keeping your books in order can increase the risks of cash flow problems, embezzlement, tax default, and many other financial headaches. If the business fails for any reason, it’s the owner who’s left holding the bag, so don’t take any risks or shortcuts when it comes to accounting.
Not Getting Workers’ Comp Insurance
Purchasing workers’ comp insurance benefits both employees and the employer. Employees are the heart of any business, and their safety should be paramount, but accidents do happen. How prepared is your company to handle a work injury? Can you compensate the employee for lost wages? Can your business handle the legal fees and settlement should an employee take you to court? Also, if you don’t have workers’ comp insurance, you may be breaking the law.
If you’re properly insured, workers’ comp benefits kick in when an employee sustains an injury while on the job. In general, it doesn’t matter who was at fault for an accident; they can file a claim and receive compensation whether a coworker, customer, vendor, manager, or they themselves cause the injury. When this happens, the employer won’t have to pay out of pocket for medical bills or disability payments while the employee can’t work.
Not Separating Business and Personal Accounts
Business owners who make this mistake tend to be the entrepreneurs who came up with a brilliant idea then started their business from their garage, dorm room, or on a single laptop. It’s also common in situations where the company started as just a side hustle using personal savings to finance production.
While it’s OK to begin experimenting like this, you have to separate your personal finances and your enterprise when you officially start a business. How do you separate the two? Create savings and checking accounts for your business and use a company credit card to make any business-related purchases. At this point, you may also consider registering your business and obtaining any necessary permits.
Establishing this division at the beginning will simplify your accounting, budgeting, and planning. It’s also important to separate your personal and business accounts for tax compliance.
Not Making a Comprehensive Business Plan
Whether you run a new venture or a business that has been around for generations, you need to have a business plan. A business plan gives you direction. It sets markers you can use for evaluation, and it helps you communicate your intentions to investors and lenders.
Detailed financial analysis and marketing strategy are two key components of any successful business plan. The marketing section should include market research that helps you and your investors see your place within the market at large. This section is also where you should narrow in on branding and advertising plans. The financial section will display past and future cash flow projections, capital injections, and expected profits or losses.
You can hire a professional to record a business plan or do a simple Internet search to find business plan templates specific to your industry.
Taking on Too Much Debt
It’s true that you have to spend money to make money. However, using credit to grow your business can be detrimental in the long run if you don’t have the proper discipline. The ease with which you can make a transaction and not have to pay for it upfront can be a minefield.
Each credit purchase comes with an interest payment, transaction charge, and also fees if not paid on time. Taking on too much debt also lowers your credit score, which will make it more challenging to secure loans in the future.
Each use of the business credit card should be well thought out and managed. If the purchase doesn’t help the business grow significantly, using credit may not be worth it. All accounts payable, especially from key suppliers, should be up to date and should never exceed what the business can handle.
Small Businesses, Big Ideas If you follow these tips, you have the potential to take your business to new heights. Remember, all companies begin as small businesses. With a big idea, self-discipline, a clear business plan, and the right investors, your small business may become the next Apple, Microsoft, or Amazon.