Dreaming of starting your own business? You’re not alone. In fact, according to the latest data from the United States Census Bureau, more than five million new businesses were formed across the country in 2022 alone. At the same time, it’s important to consider the sobering statistic that up to 45% of businesses fail during the first five years of operation.
So, why do businesses fail? Many factors come into play, but there are five key mistakes that new business owners tend to make that can hinder their success in those first few vital years. By avoiding these common mistakes, you can get your business off to a solid start.
1. Foregoing the Formal Business Plan
While drafting and refining a formal, written business plan may not seem like your idea of a good time, it is a good idea. Specifically, a business plan refers to a document that outlines the details of your business and how it will operate. This includes information on your company’s background, your perceived market opportunity, the competitive advantages of your product/service, and how much you anticipate selling.
Your business plan doesn’t need to be long or complex. In most cases, a few pages will suffice. However, having a written plan can help you (and others) better understand your company’s mission, what it will offer, and the audience you’ll be marketing to. The very process of writing a business plan can also alert you to some weaknesses or areas that may require more of your attention.
Not only does a business plan help you focus your thinking, but having one is also beneficial if you’re looking for help from investors or lenders. Most will (understandably) want to take a close look at your business plan before they’ll lend you any money.
2. Failing to Keep Detailed Books
Creating and implementing a strict bookkeeping process is not something that new business owners should put off. Ideally, this system should be in place from day one, as getting into good bookkeeping habits can set you up for success down the road. Make sure that you have a system in place for tracking all of your business expenses, accounts payable, accounts receivable, petty cash, and everything in between. Likewise, you need to be sure that all of your employees who will be handling accounting and finances are properly trained on these processes. Additionally, employees don’t only need to be properly trained, but they also need to be specialized in the field you’re working in. For example, if you’re in the agriculture industry, you should consider agribusiness accounting services so as to ensure everything is done according to norm in order to avoid mishaps later on in the future.
Keeping detailed books will help you see where your business stands financially at any given time. Plus, it will make taxes a lot easier when the time comes to file. If you’re not sure where to begin when it comes to your business bookkeeping, there are plenty of great software solutions available that can streamline and simplify the process for you.
3. Filing the Wrong Legal Structure
Another common mistake that new business owners make is that of choosing the wrong legal structure for the company itself. The legal structure you select when you open a new business will have a major impact on your taxes, liability, and other aspects of your finances. With this in mind, it is important to carefully weigh your options and decide on a structure that will best protect your assets while minimizing your taxes.
In general, there are a few common legal structures to consider when launching a new business. These include:
- Sole proprietorship
- Partnership
- Limited liability company (LLC)
- Corporation
- Cooperative
Take your time to thoroughly understand the business implications, advantages, and potential drawbacks of each structure before you make a decision for your new company. Likewise, keep in mind that you can always change the structure of your business as it evolves—but selecting the right structure from the beginning may help you avoid that hassle down the road.
Not sure which business structure is right for your company? Speak with a financial advisor, who will be able to discuss your business set-up, goals, and other important aspects of your business to help you make a confident decision. Your advisor may also be able to help you fill out and file any necessary paperwork to establish your legal structure with minimal stress and hassle.
4. Not Understanding Finance Options
Did you know that less than half of small businesses have their financing needs met? Unfortunately, a lack of funding is a common reason why new businesses tend to fail. Running out of capital may prevent you from purchasing the supplies you need to manufacture a product or on-board the employees you need to provide the best service. This is why it’s so important for new business owners to truly understand their financing options and decide on which are best suited for their needs.
These days, there are all kinds of excellent grant options available to new business owners across the United States. Explore options offered by the United States Small Business Administration to see what your business may qualify for. If you need to borrow money, there are several options available to you as well—ranging from investor loans to more traditional bank loans. At the end of the day, it’s all about finding a financing solution that works best for your growing business.
Keep in mind, too, that many business lenders will require you to submit a written business plan as part of your loan application.
5. Refusing to Accept Help
Many new business owners strive to be a “Jack of all trades,” taking on as many tasks and responsibilities as possible. Often, this is done to retain as much control over business decisions as possible while also avoiding additional expenses during a company’s crucial early years.
At the same time, new business owners need to understand when it makes sense to bring in outside help. This may include anything from hiring a financial advisor or accountant to bringing in new sales staff. When business owners are stretched too thin, they aren’t able to do their jobs well, and this reflects in everyday business operations. By knowing when to bring in additional help, business owners can focus more on the most important aspects of their work while ensuring that their other bases are covered.
The Bottom Line on Starting a Business
Starting a business can be one of the most exciting, challenging, and rewarding things you ever do. And if you take the time to carefully plan the launch of your business, while ensuring your finances are in order, you can set yourself up for many years of success and growth. By avoiding these common mistakes, you’ll already be ahead of many other small business owners as you embark on your next venture.