Top Eight Common Business Formation Mistakes
Are you interested in starting your own business? Make sure you do your homework first. Above all, you want to avoid making any or all of the eight common business formation mistakes.
Why? Business formation mistakes can torpedo your business before it starts. Starting, and maintaining, a new business is not easy. According to the Bureau of Labor Statistics, approximately 20 percent of businesses fail in their first year, and 50 percent fail by their fifth year. You do not want to your business to fail. The key to a successful business is starting out correctly from the beginning.
As a business owner, you will make mistakes. But, you need to learn from those mistakes. You also need to do your homework beforehand to learn how not to make common business mistakes.
Mistake One: Failure to Plan
You need a well thought out business plan. Think of your business plan like a road map. Before you take a trip, you usually consult a map to learn where your are going and the best route to take. The same principle applies to your new business venture.
Your business plan lays out the steps of creating and running your business. A good business plan can make or break your business. No business plan almost guarantees failure. So take the time to sit down and create a well thought out business plan.
How will you run your business. Will your business be on-line? Or, will you need an office?
What do you need to start your business? Do you need products upfront? Do you need loans?
Within your plan, you set a budget. You need to figure out ow much money do you need to run your business? How much money do you need to start your business? Do you have sufficient funds saved to float the business for the first few months? Or, will you need a loan and if so, how much?
What are your goals for your business? What are your initial expectations? Where do you want to your business to be in five years? Ten years?
Make your business plan as detailed as possible. If you are going to need a loan, you must have a thorough business plan. Even if you do not need a loan, you need a roadmap to better understand your business idea.
Mistake #2: Failure to Research
While you are figuring out your business plan, don’t forget to do your research. Talk to other successful business owners. Ask them for suggestions? More importantly learn what mistakes they made. And, then how they overcame those mistakes.
Research your market. How much demand is out there? Who will be your strongest competitors? How can you set yourself apart from your competition?
Where will your business be located? Will you operate remotely or do you need an office? If you need an office, where will your office be located? How much space do you need? What amenities will you need?
Who are your intended customers? How will you reach them?
How much money do you need to earn, after paying expenses, to live? What are the start up costs for your business?
You need to thoroughly research your business idea before starting your business. Read books, do on-line searches, talk to prospective customers, speak with business owners in your industry. The more you know upfront, the more likely your business will succeed.
Mistake #3: Failure to Choose the Right Business Entity
What type of business will you have? Will you be a sole proprietor? Or, will you form a corporate entity?
Choosing the right business entity for your new business is very important. You need to talk to a business attorney to discover which entity is best for you and will best protect you. Once you decide on the correct entity, hire your business attorney to properly set up your business. Do not try to set up your business on your own.
Also, do not forget to consult an accountant about your new business venture. You need to know the different taxes associated with the different entities.
After consulting with your accountant and business attorney, you can choose the best entity for you. And, you can set up your business properly from the onset.
Mistake #4: Trying to Do it All
When you are starting your new business, you usually start out working on your own. You wear many hats as a small business owner. As a small business owner, you are the one doing all the work. You are the marketer, the receptionist, the secretary, the worker, the bookkeeper, customer relations person and m managers. These are a lot of hats to wear.
As you grow, you will need to start hiring people to fill some of these positions. Do not wait too long or you will become burnt out and stressed. You are a human being, not a machine. No one can do it all. We all need help. If you keep trying to do it all too long, you will lose clients and customers. They will go elsewhere to get their work or products completed more efficiently.
Learn how to delegate. Consider hiring a virtual receptionist to handle your phone calls. Maybe hire someone to do your social media and other marketing. Start out by outsourcing one task and then, over time, outsource more of your administrative needs. You will find yourself becoming more productive and happier.
Mistake #5: Failure to Market
Too many new business owners think are of the mindset, “if you build it, they will come.” Gone are the days when you could just open your storefront and people would find you. You need to market your business if you want to be successful.
Most people look for a business on-line. So, you need to have a website. A website gives you credibility. Websites help people find you on-line.
You also need to effectively market your business. Get those social media posts up and running. Get out there and network. Develop relationships with other business professionals. Conduct workshops or do speaking engagements. These are tried and true methods for generating business leads and potential customers. People have to know, like and trust you before they do business with you.
Mistake #6: Failure to Budget
You need a budget. Figure out what your monthly business expenses are? How much is your business mortgage or rent? How much do you need for marketing? What are your supply costs? Employee salaries? You need to know your business expenses. Those expenses are what you need to earn at a minimum each month to sustain your business.
Then, figure out what you need to earn to sustain your lifestyle. This is the amount you will need to earn each month AFTER your business expenses are paid.
In order to be profitable, you need to set the right price for your services or products. Research your competitors’ prices. You need to offer a price that is not too low or too high. Too low, you will not generate income. Too high, you will lose business to your competitors.
Mistake #7: Improper Bookkeeping
You need to have a good bookkeeping system in place. To be successful, you need to enter your monthly expenses, deposits and withdrawals. You can use Quickbooks, good old fashioned handwritten ledgers or you can hire a bookkeeper to do this for you. Just make sure you create a system and use it.
Proper bookkeeping keeps your business expenses separate from your personal expenses. Bookkeeping allows you to see the full financial picture of your business. So, you can see exactly what income your business generates and how your business income is distributed each month. You can also make sure you will take the proper business deductions on your taxes.
Speaking of taxes, good bookkeeping makes filing your taxes so much easier. Your accountant will love you when you show up with an organized bookkeeping record.
Mistake #8: No Written Contracts
You need written contacts for all your clients, vendors, independent contractors and employees. The contracts need to specify the parties’ agreements. When you do not have written contracts, you open yourself up to potential loss and liability. Written contracts ensure that everyone is on the same page as to what each will be doing.
To make sure you are properly protected, hire a business attorney to draft your agreements. Your business attorney will make sure your agreements are well drafted and legally enforceable. Poorly drafted agreements lead to disputes and lawsuits. You want to avoid disputes.
You should also ask a business lawyer to review your leases and other contracts before you sign those documents. He or she can make recommendations to make sure you are properly protected. Remember, the person who writes the agreements is usually drafting those agreements to be more favorable to him or her. You want to level the playing field by having your own business lawyer review those agreements.
So now you know the eight most common business formation mistakes small business owners make. If you make one, it’s okay. The key is to learn from your mistakes so you do not repeat them and to avoid others that are preventable. We are here to help you succeed. Please call us today to set up a consultation.