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Common Small Business Mistakes to Avoid at Each Stage of Business

How can entrepreneurs effectively launch a small business, keep it running efficiently, and foster long-term growth? We break down each stage and discuss some common mistakes business owners could fall into.
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Taking an idea and turning it into a long-term success often means making smart business decisions as your company grows. According to the U.S. Bureau of Labor Statistics, about 20 percent of small businesses fail in their first year, and 50 percent of small businesses fail in their fifth year.

How can an entrepreneur effectively launch a small business, keep it running efficiently, and foster long-term growth? We break down each stage and discuss some common mistakes business owners could fall into.

Stage I: Mistakes made by startups

1. Expecting immediate profits

When launching a startup, owners need to realize that they may not see profits for several years. For this reason, many entrepreneurs decide to work full time while building their company — about 59 percent, according to a 2018 Paychex survey. While sales may be solid, the sheer volume and scale of startup costs means that entrepreneurs may need to be ready for some lean years during the early stages of any enterprise's lifespan.

While there are serious financial considerations to take into account during these first few years, entrepreneurs need to also mentally prepare themselves for this period. Some business leaders second-guess their decision to launch when times are difficult early on. However, by staying productive and creating a detailed business plan, entrepreneurs can stay focused on building up their business, even when revenue streams are modest.

2. Incorrectly budgeting startup costs

From office furniture to fees for establishing a business, there are certain costs that many small businesses simply overlook. One of the top pitfalls of starting a new business is failing to account for just how much it will cost and making sure the funds are available to cover initial expenses. According to a Paychex survey of 1,000 individuals considering opening their own business, about 59 percent of respondents expected to self-fund their new company. Before risking your personal savings on a new venture, it's important to understand all the costs related to opening and operating a company. Often, owners will fail to include lesser-known costs in their budgets, which can have a negative impact on the bottom line. More importantly, it can create serious cash flow problems that may threaten a business's existence.

3. Locking yourself into an unfavorable lease agreement

The space where you conduct your business can be of vital importance. It can help you and your team be more productive, help visiting clients feel more confident in your firm's stability, or give you access to vital retail traffic.

The challenge is that this is an ongoing fixed cost that is completely independent of your revenues. It is a legal commitment that can hamstring your ability to actively manage your cash flow when times are tough. You are at the mercy of the lease.

Rather than commit to a long-term lease agreement, many small business owners are now using incubator spaces, pop-up facilities, and other shared and subsidized office arrangements. These provide solid, low-cost alternatives to traditional office spaces, and offer the flexibility to scale up and down in line with real-time budgets.

4. Failing to create a solid marketing plan

A marketing plan is a roadmap to the objective of getting the word out about your products or services and making a compelling case for prospective customers to purchase your offering. A solid marketing plan should include:

  • A series of steps to promote your business, with accompanying deadlines for completion;
  • A breakdown of individual initiatives or campaigns, with projected ROI and anticipated long-range growth; and
  • A back-up strategy in case your key promotions fall through.

Putting together a marketing plan can help you gain a better understanding of your average customer's value and lifetime, the costs involved in new customer acquisition, the difference between a desirable customer and those not worth your effort, and the intricacies of all the marketing channels available to you. Such information is virtually priceless in assessing your status in the marketplace.

5. Launching without the right intellectual property protections

Imagine you've got a great product design. You've put together the necessary inventory and have partnered with the right distribution channels. The business is just starting to roll. Then the same product appears from someone else — plus it’s cheaper and more widely available. Your business has literally been stolen out from under you.

You can prevent this scenario with the right kind of intellectual property protection. Different types of patents, including utility patents for new applications of existing products, are available to help protect small business owners and their investments.

It is important that you consult with an attorney to ensure the correct safeguards are in place — including patents, right-to-use paperwork, licensing agreements, and other forms of intellectual property protection — before you put in too much of your hard-won cash.

6. Failing to pick business partners wisely

Not every entrepreneur has expertise in accounting, taxes, marketing, and finance, but these are vital skills in the business world. If you need to fill in gaps, you may choose to partner with someone whose expertise can help provide balance and create a well-rounded management team. However, making poor team choices or putting trust in the wrong people was named as one of the top small-business pitfalls by a panel of 31 entrepreneurs interviewed by Paychex. When it comes to business partners, employers, and external business relationships, it's important to build relationships and make sure you're engaging the right person for the job.

Although finding the best business partners can pose a challenge, failing to ask for help when needed was another common small business mistake cited by the entrepreneurs mentioned above. Knowing when to bring in an expert can help you run your business efficiently and avoid the need for you to learn everything from day one. For example, although a professional accountant may not need to assist with early stage day-to-day accounting, a CPA can provide high level expertise to startups. Many CPA firms will gladly sit down with entrepreneurs and share small-business tips and other guidance on current accounting issues. Accountants and lawyers can also advise companies on selecting a structure and discuss potential tax-planning issues. Future accounting mistakes can be avoided by working with a professional accountant to properly set up a new business.

Stage II: Mistakes made by established businesses

1. Falling behind with accounting

In the midst of the whirlwind of your daily routine, accounting concerns may take a backseat to operational priorities. But as your business matures, at some point you'll need to circle back, correct mistakes, and account for every transaction. If receipts are piling up or you're having trouble balancing your balance sheet, it may be time to consider an alternative solution to your manual processes.

Accounting software is one way to become more efficient, eliminate computational errors, and prepare financial reports in an industry-accepted format. Built-in data backups and security can protect your information; when year-end approaches, you'll be happy to have financial data stored in a format that can be easily transferred to your tax preparer. 

2. Rushing to add administrative positions onto your payroll

Everything is important when you run a small business. But as a small business owner, there is only one of you, and you can't do it all. Differentiating your business, finding your next customers, closing the next sale, and making sure you provide a quality experience that keeps them coming back are all essential, revenue-generating tasks that should be taking your time.

It makes sense to bring people on to help with the internal, administrative duties that have to get done but don't necessarily contribute to success. Unfortunately, these employees can take a toll on your cash flow. And when revenue is lean, they still need to get paid.

Instead, you should consider outsourcing some administrative tasks, which can often be done at a fraction of the cost it would take to hire an employee to do them. For instance, you will want to hire employees to help sell, make products, and provide service. But to pay them, you may consider outsourcing to a company that can handle this for you without the commitment of salary, benefits, and training that an employee would cost.

3. Making regulatory mistakes

When you hire employees, there are many state, federal, and local payroll and employment laws that come along with them. To make things even more complicated, these laws and regulations may overlap and can be amended. Unfortunately, ignorance of the law is no protection to you as an employer. If you accidentally run afoul of these rules, you could be subject to heavy penalties and fines, some of the costliest ramifications of making business mistakes.

These are just the types of unexpected hits to cash flow that can lead to real problems for your business. If you're in a good position financially, you may now find yourself in trouble. And if you're squeezing by, this could cause irreparable damage.

Instead of trying to keep up with everything yourself, it makes sense to bring in external resources that specialize in these matters and hold any necessary licensing. Tax filings, payroll processing, workers’ comp insurance, and other HR matters often make sense to outsource, and can help protect you from costly and unnecessary mistakes.

Stage III: Mistakes that could hold your company back from growth

1. Overextending your geographic reach

In the search for new customers and new markets, it is easy to cast your eyes far and wide. After all, if you can find hundreds of customers in your hometown, you should be able to find thousands in the many hometowns across the country.

But travel costs money. Flights. Hotels. Rental cars. Meals. It can all add up very quickly. This gets further complicated by the fact that you will be battling uphill when working outside your community, whether it's unfamiliarity with the location, battling against local competition, or other challenges. You simply won't have the support or the network you need in these other locations.

A wide-ranging customer base can also create demand for emergency travel, which can be expensive. This commitment to existing customers will go on, regardless of whether you can afford to support it every time.

Instead, consider first focusing your efforts close to home, and grow geographically in a scalable fashion. When that reach is necessary, make sure you have partners and technology solutions in place ahead of time to minimize the amount of costly travel required.

2. Not reading (or understanding) terms of credit agreements

Business loans can provide the necessary liquidity to balance out seasonal cash flow or the funds can be used to help your company grow. If you think a loan would benefit your company, be sure that you understand what you're committing to in terms of payments, collateral, and interest. Rather than striving to make monthly payments on time, businesses should set a goal to optimize their credit position. Carefully read and understand all credit agreements before accepting funds. This includes credit card agreements, with their related interest and fees, lines of credit issued by banks, and other commercial loans.

In today's market, many financial products are available for small businesses, from crowdfunding to venture capital and small-business loans. Taking the time to compare the financial ramifications of the different types of loans available can potentially yield large savings in interest and fees. Also, from an accounting perspective, small businesses need to stay in compliance with credit agreements, and should record all required information properly in their financials.

3. Getting it wrong on social media

Establishing your brand's digital platform and an online presence is vital for long-term success. You may want to include a social media strategy in your marketing plan, based on market research identifying sites frequented by your prospective customers. This way, you can diversify your social media activity to cover a broad span of platforms. Additionally, it's important to do your due diligence and understand any disclaimers and disclosures required by prevailing federal and state privacy marketing regulations as you prepare your social media strategy.

Tracking performance is essential to avoid wasted time and money spent on ineffective marketing campaigns. Most social media platforms come with built-in analytics and tracking tools to assess the effectiveness of your tweets, blog posts, ads, and so on. You can also employ promo codes, unique URLs, online customer survey tools, and customer relationship marketing platforms to precisely quantify the results of your social media strategy.

4. Failing to measure the right information

If you're not measuring company performance, you can't grasp the success or shortcomings of your overall business strategy (and if you measure the wrong information, you risk staying in the dark). For example, you don't want to invest in a new growth opportunity without fully analyzing the potential profits. Don't assume that the status quo will carry you into the future. You should always be looking at ways to improve, and planning for changes to help your company thrive.

Businesses fail every day, but many times it has nothing to do with whether they provide quality products and services. Instead, it could be due to mismanaged budgets, making inflexible cash commitments, and finding themselves without the capital they need to continue operations.

To succeed, you must be strategic with your time and your small-business budget. Both need to be invested wisely, and concentrated on efforts to drive revenues and growth. Working with a trusted third-party provider in areas such as payroll can free up your time to focus on running your business and help you avoid potential business mistakes and common pitfalls.

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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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