When I consider what it takes to succeed in business, I am always reminded of something I learned when I was young., My parents were entrepreneurs and my father gave me a piece of advice that has resonated with me ever since.
“If you take care of the little things, the big things take care of themselves,” he said.
It was true when he said it and it’s true to this day, especially from a business standpoint.
People are starting new businesses every day. And when owners enter the market, almost all of them make mistakes, many of which are understandable and even predictable.
But there are some mistakes new business owners should strive to avoid. Many of those errors can be prevented with a good plan, the right people and tips on what to do if you run into trouble.
Here are some pointers for new business owners who want to stay in the black.
1. Set everything up correctly at the start
The first, and most important, decisions you make as a business owner involve personnel and a business plan. It doesn’t matter if you start a sole proprietorship, corporation or limited liability company. You could have the best idea in your industry, but if you can’t execute it in a meaningful manner, the idea may never get off the ground.
Start by surrounding yourself with a team of professionals you’re comfortable with. Hire an accountant who can stay on top of tax issues and help you manage the financial side of the business successfully. The other important professional on your team is a legal advisor who can contribute to a healthy business plan, make sure that the business is set up properly and help you make appropriate tax, employment, planning and other decisions.
The business plan is just as important. You need to find out how much it’s going to cost to start a business and how long it will take to be self sustaining. Too often I see businesses failing because they didn’t set the stage with, or follow through with, a solid business plan.
2. Maintain tight control over financials, tax deposits and bank accounts
If you’re not good with numbers or finances, it’s a good idea to try to learn. One of the main reasons companies run into financial trouble stems from failure to keep track of the money.
Savvy business owners check bank accounts daily, always review the bank statements and are involved in every check written, every deposit and the review of all cancelled checks. Business owners should always be personally involved in payment of employment taxes and the review of quarterly and annual tax returns. These are tasks that should never be delegated to an employee.
Staying on top of accounts receivable is also important for any business. When accounts are not paid on time, appropriate follow up with clients is imperative. Many business owners prefer to let things like this “work themselves out.” But frequently a cash-flow problem ensues and getting the account back on track becomes much more difficult.
If you find yourself in a scenario like this, deal with it affirmatively with the client or customer. Work out a way for the customer to pay off what is owed while continuing to supply a service or product, such as by requirement payment on a COD basis for current invoices and, with each order, payment of a certain percentage of the balance owed. Work out something that makes sense to both parties involved to keep the relationship, while at the same time, includes a payment plan that does not put your business at risk.
3. Don’t dip into your retirement without first seeking professional advice
When business owners are facing a cash crunch, the temptation is to dip into personal savings or even worse their own individual retirement. When this occurs, it should be a red flag that help is needed immediately, before the decision is made to fund the business with retirement assets.
There are many reasons why using retirement to fund a business is extremely problematic. The owner pays an additional tax for early withdrawal, which is very significant. Peace of mind and the knowledge that retirement is available when the time comes is lost. Most importantly, the decision should only be made after an informed assessment of whether the investment is ultimately worth it. In other words, the investment of retirement savings may not ultimately be worth it.
I encounter many business owners who, by the time they seek help with financial trouble, have already dipped into their retirement. Because the decision has already been made, the negative ramifications of the decision are already present and the assessment of the business (is this investment worth the risk of losing retirement assets?) is made in hindsight. The far better approach is to make a decision as serious as this with foresight, after seeking advice from professionals. Contact your team of professionals when you find yourself facing a decision such as this. If necessary, your professionals can refer you to a specialist.
4. Diversify customer base
Many businesses have the tendency to focus on one client base. That’s great. Ride it for as long as it lasts. But what if that well runs dry?
Chances are it won’t last forever. That’s why you should always make sure your customers are diversified. Any business can benefit from some diversification of its customer base.
Pay attention to your competitors to see who they target and be smart about opportunities to expand your reach. If your business is having trouble collecting or is facing financial issues, always look for ways to extend your base.
Operating a business may bear a lot of similarities to maintaining your health.
If you’re showing signs of illness, the sooner you visit a doctor the better. The same can be said of owning a business; if you’re starting to experience difficulties, see your team of professionals that helped you get the business started. If necessary, one of them can refer you to a specialist.
Cecilia Lee, Esq. practices business law and advises clients in all aspects of the debtor-creditor relationship, including bankruptcy. She has practiced law for 28 years working for businesses, financial institutions, not-for-profits, governmental entities and individuals. She is a certified business bankruptcy specialist, is a member of the American Bankruptcy Institute’s Committee on Consumer Bankruptcy Law, and an adjunct professor of bankruptcy law at Willamette University College of Law in Salem, Oregon. In her spare time, she is a member of the Silver Striders and the Susanville Symphony Orchestra.