According to the SBA Office of Advocacy [PDF], only half of new businesses survive for at least five years, and only a third of them make it for 10 years or more. With odds like that, you’ve got to do everything you can to increase your chances of success. There are some common mistakes that first-year business owners tend to make that negatively affect those chances. Let’s take a look at six common errors to steer clear of.
1. A Lack of Initial Cash
A new business needs more cash than just enough to open its doors. There is typically a lag time between the opening of your doors and that sweet moment when paying customers are plentiful enough to cover the bills. In between, you’ll need enough cash reserves to cover the operating costs on your own. To get an idea of how much you’ll need, figure what it will cost you to stay open for three to six months without any profit, and then add some padding for unexpected events and emergencies.
2. Starting Too Big
Many new business owners think they have to spend a lot of money to get everything just right before they open their doors. For instance, they rent space for the business they imagine they’ll need in the future instead of starting out small and expanding as their profits grow. The same holds true for hiring employees. A new business may be able to get by on fewer employees — or none at all — until the paying customer base increases. We’ve all heard the inspirational stories of large, profitable companies that started in a garage or at the kitchen table. In many of those cases, the reason they went on to become so successful is that they started small and only expanded when it was justified by profits.
3. Ignoring the Business Plan
There is a reason lenders and investors make borrowers go to the trouble of writing a detailed and well-thought-out business plan. If used properly, it can chart the course to success for new business owners. But too many people simply view it as something they have to do in order to get the startup capital they need, and then ignore the plan when it could help them the most. A well-devised business plan should tell you how much money you need, what to do with it, and what steps you need to take to achieve success. In short, it could save you from making a lot of the financial mistakes we’re talking about here.
4. Letting Accounts Receivables Stack Up
In an effort to make as many sales as they can, many new business owners give clients too much lag time on their payments. This can quickly result in an accumulation of accounts receivable which, if left unchecked, can cripple your cash flow. Make it a priority to begin collection efforts on invoices as soon as they become past due, and never let client’s invoices stack up, no matter how much business they do with you.
5. Not Keeping the Books
In order to get an idea of where your business is going, you have to know where it’s been. And the only reliable way to get this picture is with your financial records. Some new business owners are so busy running the business that they put off keeping their books in order, and this can lead to missed opportunities or even a financial disaster down the road. But it doesn’t have to be that difficult. If bookkeeping isn’t your thing, simply use software like QuickBooks or hire an accountant.
6. Not Protecting Personal Assets
Unless you take some precautionary steps, a business failure can also lead to personal financial ruin. One of the ways you can protect your personal assets is to set up your business in a way that identifies it — and its debts — as separate from you. If your business is structured as a corporation or an LLC and it fails, you won’t personally be responsible for its debts. But be sure to keep your business and personal accounts strictly separate or else you risk losing that corporate shield. You can also purchase liability insurance for your business that will pay for medical bills, lawsuits, and attorney’s fees if there is a business related accident or you’re sued.
The first year of a new business can be tough to navigate, but if you keep these potential financial mistakes in mind, your road should be a little smoother.
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