12 Pitfalls Every Small Business Owner Should Avoid
Any entrepreneurial venture, however sound it may look on paper, always has potential for missteps, mishaps and mistakes. Every business owner, however learned in the ways of management, will from time to time find himself in sticky situations. Being successful at business is a tightrope act, one that can reap great windfalls or leave you in ruin. While dreaming of the former, a business owner should never lose sight of what might happen if the latter came to pass.
Small business owners, and specifically new business owners, usually make some very common mistakes which could be avoided with diligence and understanding. Basic mistakes in accounting and client and employee retention can often cost a small business dearly. Most small businesses fail within the first five years of operation primarily because of a lack of planning.
Starting with a Loan – Small business owners, in hopes of making it big fast, often end up borrowing large sums of money, either from banks, credit card companies, home equity loans, or friends and family. As the business starts off owing money, there is pressure to make profit immediately as there are payments to be made on the loans. The ideal approach is to save a good amount of money and rely on those savings as your primary capital when beginning your business. But if at all you feel you need a loan, make sure you do your research and go with a trusted organization for the same.
Impetus on Making Profit – Most small businesses fail to post profits in their first two years. For a new, small business owner it is advisable to have an alternate source of income to sustain yourself during the start-up period.
Overspending – Starting a new business does not necessarily mean a large investment as some new business owners feel. It is often a feeling among them that they need to spend a lot to purchase the best of everything from marketing help, to equipment, to software. For those willing to research there are always more viable options available. Creating and sticking to a well-planned business budget will curb overspending.
Underspending – And then there are those who refuse spending much on anything. While there are ways to start and develop a business with limited funds, not investing any kind of concrete capital in your business can seriously limit your potential for success.
Not Keeping a Track of Receivables – Getting paid is undeniably the most exciting part of running a business. But keeping a track of your receivables is definitely not that exciting. A receivable is recorded when an invoice is issued, it means that a customer owes you money. When you see the customer’s balance as outstanding on your receivable listing, he is still to pay you. As soon as you receive payment from that customer it should be applied against the invoice and marked as paid.
However this is easier said than done. There is never enough time in the day for a small business owner to follow up and reconcile customer deposits. This leaves the business owner sitting in front of a bunch of customer deposits with a receivables report that does not make sense. Over and above the hours wasted updating receivables listing you also end up overpaying your taxes and can incur high debts.Follow up on your receivables regularly and apply payments to invoices every month, this can help you save a ton of resources in the future.
Not Keeping Expense Receipts – New business owners often fail to save copies of expense receipts. This causes a series of tax, accounting and cash flow problems. How many times have you checked your bank statement only to get stumped when you think about that additional $100 charge? It could have been supplies, a business meal, equipment, or even a personal expense that you paid for with your business card. The lack of an actual receipt can result in incorrectly reported tax expenses and a high tax bill if audited.
Over-Extending Credit – In the hope of increasing revenues and growing at a faster rate, many small businesses extend credit to customers who pay late or worse still, never pay at all. While most businesses have their share of late or uncollectible accounts, it’s crucial for a new business to minimize bad debts.
If you are to sell on credit, make sure you run credit checks on your customers. Take care that the customers completely understand and agree to your terms of payment before doing business with them. Slow paying customers are often waiting to take advantage of ambiguities in payment policies. While it may seem attractive to take on as much business as you can, especially when the bills are piling up every day, know that it is better to have no business than give away free business.
Not Keeping an Eye on the Taxes – Many new business owners tend to put off the topic of taxes until the last minute. This procrastination can prove very costly when paying your taxes. Most owners do not have a sound tax strategy, and those that do fail because they fail to seek knowledge and advice before they engage in any activity that has a taxable effect.
Small and new business owners need to learn how to consider tax ramifications before acting. Planning is definitely the key to reducing the amount of taxes you pay each year. It is absolutely essential that you do everything possible to minimize your costs of doing business, and since taxes are a large expense it is only right to give your tax strategy its due. This means you need to have a sound grip on your taxes, before and during the financial year, not after.
No Clear Leadership – Many business owners limit their growth by failing to learn as their work expands. You must be well informed about all the latest developments in your industry and be familiar with every nuance of your business. Some business owners go into delegation mode as soon as they have a work force under them. This results in them losing touch with the grassroots of their own business and alienating their employees. There are others who go into an obsessive micro-managing mode which too can hinder the smooth operations expected of a business and also get on the nerves of the employees.
The success of your company depends upon you being a strong and effective leader. There is no need to be authoritarian, but you shouldn’t be everyone’s buddy. A great leader is always communicating with his team and inspiring them to perform to the next level without pushing them too much.
All Business All the Time – As is true for any activity, all work and no play makes Jack a dull boy indeed. Many entrepreneurs put their personal lives on a hold while they go about trying to set up their business. The end result often is that both suffer. There is no question about the fact that your business needs your constant attention and energies, but you have to draw a line somewhere. There always needs to be time taken out for yourself to ensure that when you return to your desk you are revved up.
No Common Vision for the Team – It is not for nothing that highly paid professionals leave their cushy corporate jobs to go to work for start-ups. It is working with people who are driven by a common purpose that drives them towards working with new businesses. Many businesses fail to define their goals and purpose for existence. These companies continually attract a mix of employees pursuing their own agendas and seeking success in their own ways. It becomes difficult to bring all the employees on the same page often resulting in the working culture of the company being adversely affected. Clarify the purpose of your company at the outset to your employees and set the stage for attracting employees in tune with the purpose you have set out to achieve. There is no force stronger in the corporate world than a team focused on a singular goal.
Letting a Customer Govern How You Do Business – It is not for nothing that we have been told, since time immemorial, not to put all our eggs in one basket. There will always be someone or the other who will tell you how you can or should run your business, usually these are the people who are looking to get a sweet deal out of you. Never let a customer demand that you put them first. But at the same time you must also strive to treat everyone with courtesy and respect even if difficult.
Now that you are aware of the most common pitfalls facing your small business, be guarded against them. Small business owners everywhere need to be on their toes when it comes to competition today. Keeping the above mentioned points in mind will go a long way in aiding you in setting up your business with the least problems.