Starting and growing a company isn’t for the faint of heart. The stakes are high, and the potential for error is staggering. Nearly 50 percent of all new businesses fail within five years, and in 10 years that number balloons to about 65 percent. No one sets out to go out of business, so why do so many owners close their doors (virtually or otherwise) within a few years?
A big piece of the puzzle hinges on sound financial decisions — or lack thereof. New companies make a lot of common mistakes when it comes to managing their finances, but luckily, there are many ways to avoid them. Here’s how:
Mistake #1: Not automating key processes
You’re just starting out. Maybe you only have a couple of employees and your business is still taking off. It’s not so bad to keep track of timesheets, expenses, payroll, and invoices in spreadsheets and word processing docs, right? Not quite. The problem with this mindset is that “it’s not so bad” is a slippery but subtle slope into “it’s only a little bit of a pain” to “it’s kind of a pain” to “running payroll just took an entire Saturday.” The other problem? Digging yourself out of a manual-entry nightmare is a LOT harder and more costly than automating key processes early in the game.
How to Fix It:
- Start early, or start now. Put the odds ever in your favor by automating early, since, as Finnick from The Hunger Games wisely states, “It takes ten times as long to put yourself back together as it does to fall apart.”
- Know which processes are most critical to automate to keep your business running smoothly. Your top-three must-automates should include the following:
- Time tracking: Manual entry, guesswork, and low accountability are surefire productivity killers. This calculator shows how much you could save by automating time tracking alone.
- Payroll: The complexities and manual entry of non-automated payroll can consume your business as it grows. Automating payroll can save you thousands in time, money, and headaches.
- Invoicing and expense tracking: Cash flow is the lifeblood of your company. Making the process of getting paid a burden opens the door to procrastination on all ends. Automate expense tracking to make it simple and accurate.
Mistake #2: Misclassifying yourself or your employees
Classification can seem like a bureaucratic detail when there are so many other aspects of your business to focus on, but it can make a world of difference. In fact, correct classification can mean the difference between smooth sailing versus unexpected taxes and expensive lawsuits. Are you an S-Corp, C-Corp or an LLC? Sole proprietorship? It’s critical to find out. Avoid unwanted surprises by learning more about the benefits and drawbacks to the various types of business classifications.
When it comes to classifying employees, ignorance is not bliss. While it can be incredibly useful to use freelancers to grow your business, a worker that began at a few hours a week but slowly increased their hours isn’t a contractor anymore, and if the misclassification is discovered you’ll owe up to three years in back wages for any overtime, as well as penalties for insurance and benefits denied under the Affordable Care Act.
How to Fix It:
- Talk to an accountant and an attorney when it comes to determining the best business type for your needs. The consulting fee might pinch just a bit, but trying to untangle an ill-fitting setup will be far more painful. Many businesses make an election based on a few limited factors (like tax benefits) but don’t consider other key factors (like ease of selling the company) until much later. If you’ve already elected a business type, consulting with an accountant and attorney is also critical, and the earlier the better.
- Use employee management tools to keep track of hours and tasks, particularly formanaging mobile employees, as your company grows and roles change. Employ an accountant familiar with your business model to help you keep things aboveboard with employee classification.
Mistake #3: Overextending and underestimating
As you’re trying to find your stride in the early days of your company, it’s all too easy to go over and under when it comes to critical areas of inventory, scheduling, product offering, product scope, and approach to funding — which can come with disastrous financial consequences. Finding the difference between a calculated risk versus a knee-jerk reaction, just enough and not nearly enough, and too broad versus too narrow can be costly and harrowing.
How to Fix It:
- Stop trying to be everything to everyone. Although it might seem counterintuitive, it’s the surest way to sink yourself. Evaluate your strengths and your niche with some brainstorming and market research, then execute your narrowed focus really, really well. Also, try to integrate with partners in your line of work who are doing the same thing.
- Use forecasting solutions when it comes to inventory. Inventory forecasting software can help avoid missed opportunities or overreaches when it comes to selling any type of product.
- Network with more experienced thought leaders and business owners to gain their perspective when it comes to big issues like funding, launching a new product, or growing your company. And then listen! Let someone else’s hard-earned advice save you thousands.
Avoiding these pitfalls (or course correcting as necessary) will put your business in a position to grow without being sidetracked by unnecessary entanglements. And not only will you save on expensive mistakes by automating, classifying correctly, and finding your happy medium, but you’ll give yourself a significant leg up on the competition.