It’s always exciting to start a new business and to fulfill your dream of being your own boss. There are so many promising opportunities to explore, but the task can be daunting.
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According to Erica Sandberg, Credit And Money Management Expert Contributor at Bankrate.com, there are also some pitfalls. The U.S. Bureau of Labor Statistics reports that approximately 20 percent of new businesses fail during the first two years. Initial expenses can also be a daunting factor. Depending on your enterprise, you may need to invest several thousand dollars before you ever open your physical or virtual doors.
Don’t be dissuaded, though. There are many benefits to having your own business, from overseeing your schedule and maintaining independence to unlimited financial rewards and the opportunity to be innovative in your field.
With the right strategy, you can overcome the challenges that trip up many new business owners, including funding and organization issues. It’s also critical to manage your finances correctly and consistently.
4 mistakes to avoid when starting a small business
As the old axiom goes, knowledge is power. By understanding the most common errors made by other entrepreneurs, you can take action to avoid them. Here are the top four mistakes that drag new small-business owners down.
1. Neglecting to make a business or marketing plan
You may have a groundbreaking service or product, but it won’t matter unless others know about it. And word-of-mouth won’t cut it for most businesses. One of the first things you need to do is develop a business plan with marketing in mind.
Researching where your clients or customers hang out online is key, says Dequiana Jackson, a small-business marketing strategist and CEO of Inspired Marketing. Know where they’re posting, engaging and sharing so you can create meaningful content that’s not just compelling, but also reaches them on the right platforms.
“If your company is B2B, it’s possible your clients are on LinkedIn looking for tips on growing their small businesses,” says Jackson. “If you have a products-based company, your customers may be on TikTok and YouTube looking for product tutorials.”
Be sure to conduct market research, too, to identify what gaps exist in your industry. Uber, for example, entered the market when there were already multiple transportation options. But it addressed the fact that there was no easy way to order on-demand transportation services. Uber filled that gap.
“Even in less innovative businesses, you can create a competitive advantage,” says Jackson. “Perhaps the norm for getting a product in the hands of customers is six weeks, and your business has systems in place to cut that time down to three weeks. That’s an advantage customers will appreciate. Enhanced customer service is also an easy win for small businesses that can offer a more personalized shopping experience, like special packaging and handwritten thank you notes.”
A business plan that incorporates marketing will help you and your team because it provides clear direction. “You go in knowing your target market, the products and services you want to offer them and the competitive advantage that will help close the sale,” says Jackson. “It saves money because you can focus your advertising efforts only in arenas where you know your ideal clients will be receptive. Your marketing plan should also help define your brand, the way you show up in the market to your customers.”
2. Trying to do everything yourself
There’s a time to DIY and a time to delegate. Be sure to respect the difference. Hiring people to assume duties you can’t reasonably handle will be money well spent, says Neale Godfrey, small-business consultant and author of “Money Doesn’t Grow on Trees.”
“You have to accept that you are not an expert in everything,” says Godfrey. “A lot of businesses fail because the entrepreneur is not willing to give up the reins to other people who may do it better. Yes, it’s your idea, your baby, and you’re protective about it. However, bringing experts on board will free you up so you can do what you do best.”
By delegating responsibilities to trusted staff or consultants, you will have more opportunities to focus on your product or service. Having a team that will work on your mission will not just provide you with valuable insight and assistance, but you will enjoy the flexibility to take a break, step back and develop ideas.
This doesn’t mean you completely surrender control. If you hire a designer to help with the look of your café, or a developer for your website, maintain regular involvement. If they take too much liberty, the project can spin into something you don’t want. You always have the final say. Remember, your name and finances are on the line, not theirs.
3. Ignoring the paperwork
As wonderful as it would be to simply hang out your shingle and announce you’re open for business, you do have to follow the proper protocol. Plenty of small-business owners get into hot water because they didn’t submit the proper documentation. Essential paperwork includes:
Permits and licenses. There are specific licenses or permits your business may need to start up, and you can find them at the Small Business Administration. Contact the SBA if you have any questions.
Business structure. If your staff is a party of one, you may be a sole proprietor and stay that way. Or you may launch as a more formal company. “The most simplistic business structure, in the beginning, will usually be best,” says Godfrey. “For many, that means starting as an LLC to protect your personal assets.”
State and federal tax IDs. An Employer Identification Number (EIN) is similar to a Social Security number, but is specifically for your company so you can pay state and federal taxes. If you’re a sole proprietor, you will not need an EIN and can use your Social Security number instead.
Business name. Once you know what you want your company to be called (and have made sure it’s not already taken), you’ll need to register it with the state in which you’re conducting business and possibly with the federal government.
Business bank account. You want to avoid mixing your personal and business finances, so open a designated business bank account. It will also help you manage your taxes. You’ll need your personal identification and that of any co-owners who have more than a 25 percent stake, the company’s EIN (if you have one) and the name and address of your business. You’ll also need to list the legal structure of your business.
Health insurance requirements. Small businesses with fewer than 50 employees aren’t required to offer health insurance, but if you plan to grow quickly, be prepared.
4. Not having a budget
And then there’s cash and credit. Zainep Mahmoud, senior business director at Capital One, stresses the importance of creating a business budget for current and projected expenses. “Budgeting early and often is a critical practice to manage cash flow,” says Mahmoud. “Positive cash flow is what keeps a business afloat and drives growth.”
Creating a budget in advance will help you identify how much money you will need to meet such financial commitments as payroll, rent and inventory. With the unpredictability of today’s economic landscape, you will want to plan for several different potential scenarios. This way you will have backup plans and budgets fleshed out ahead of time.
To manage short-term costs, get a business credit card. Not only are they safe and convenient payment tools, but they are also specifically designed with the small-business owner in mind. They tend to have large credit limits, and you can buy what you need without using up all your capital. Plus, you can pay over time if necessary.
The perks, rewards and benefits are different from what a personal card offers, too. “Using a business credit card as the primary purchasing solution for business expenses like inventory, equipment, software, advertising and shipping could mean thousands of dollars back to your business in the form of rewards,” says Mahmoud. When cash is tight in the beginning phases of your business, rewards that you can reinvest will offer some financial relief.
To keep everything in order, consider investing in accounting software such as QuickBooks or FreshBooks. However, do not hesitate to hire an accountant if you’re out of your depth. “If you struggle at all or simply don’t have the time to dedicate to managing your finances and sticking to a budget, that’s a sign to bring on an expert,” says Mahmoud.
The bottom line
Starting your own business can be an exciting yet stressful experience. You’re going to make your own mistakes, but it’s also great to learn from the mistakes of others before you make them.
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