Starting a new business is challenging in many ways. You'll start with a business plan, objectives, defined goals, and a vision.
However, when it comes to executing the plan, things get complicated.
Many business owners make mistakes at the beginning that are avoidable. Mistakes made in everyday business operations can be ratified. Business strategic mistakes can prove costly, though. One way of avoiding these costly business mistakes is to learn from others. Inevitably, everyone is prone to mistakes, the goal should be to learn quickly and avoid them in the future.
The Biggest Mistakes New Business Owners Make in the Beginning
Strategic planning is of utmost importance in the beginning. Think of your business as a long-term project. You’ll need to make short-term decisions too, but these are long-term decisions that will affect your business strategically.
Let us analyze some of the biggest mistakes new business owners make in the beginning. And hopefully, you’ll avoid them!
Not Choosing the Right Entity Structure
Most of the new business owners start as sole proprietors. It’s the most common legal entity structure amongst the entrepreneur club. Some new ventures start as a partnership as well.
A sole proprietorship or a partnership can be good options for small businesses in the beginning. However, things get complicated and costly as your business grows. Tax bills come through tax brackets. Some legal entity structures provide better tax relief than others in particular situations.
As a new business owner, you can choose from one of these common entity structures:
- A Sole Proprietorship
- A Partnership
- An LLC
- A C Corporation
- An S Corporation
Different entity structures can have different tax implications for you. For instance, an S corporation passes on all the profits or losses to the owners. Hence, their tax implications can be significant as compared to other entities such as a limited liability corporation.
Choosing the right entity structure does not come with tax implications only. It affects the business profitability and liquidity in the long run as well. It can also save you from legal complications if you have more than one partner as a business owner.
Not Separating Personal and Business Accounts
Separating a business and personal account should be your top priority as a new business owner. Even if you run a small business, you should never make this mistake right from the beginning.
Separating business and personal accounts would mean segregation of business resources. You’ll be able to efficiently manage business revenues and expenses. It will lead you to easy identification of business expenses and invoices as well. Thus, your business financials will look cleaner right from the beginning.
Keeping separate financial accounts will lead you to easier audits as well. It will also provide you a legal cover in case you need proof of income or expenses in audits.
Starting without Budgeting
Budgets are the financial controls for any business. Many business owners neglect the importance of budgeting in the beginning phase. They spend money on important business aspects but they never prioritize them. One of the key reasons for failing to do that is the lack of budget planning.
Once you set out defined budgets, you can then compare actuals and standards. It will help you improve your business operational and financial efficiency significantly. You can then implement effective controls to overcome variances in budgets.
Tax Filing Without Tax Planning
One of the biggest mistakes new business owners make in the beginning is to file taxes without tax planning. Either they outsource the task at the end of the tax year or leave it to a non-professional.
Businesses need to file for estimated taxes, payroll taxes, income taxes, and other taxes. Estimated taxes are filed throughout the tax year of the business.
Managing tax obligations require proactive tax planning. It includes several important points including choosing the right entity structure, keeping accurate accounting records, managing deductions and credits, managing cash for tax obligations, and filing returns timely.
Not Managing Payroll Taxes Properly
Managing payroll taxes, in the beginning, can be a tough task for many business owners. If you hire even one employee, you’ll need to comply with the employer’s tax obligations.
Some businesses would offer voluntary deductions. These payroll deductions can include retirement plans like 401(k), medical and health insurance, and employee stock compensation programs.
As an employer, you’ll need to file for the employer’s portion of taxes for all employees. You should also carefully consider the proper employee tax reporting requirements. For instance, you’ll need to use the 1099-NEC if you pay compensation to non-employees of your business. You’ll use the W2 for employee salaries and wages reporting.
Inaccurate Record Books
It is another common mistake made by new business owners. They fail to develop effective procedures and rules for their record books. Also, it gets harder for them to follow the accounting standards such as GAAP right from inception.
Inaccuracies in accounting and financial record books would lead to inaccurate tax filing as well. It can have manifold implications for a new business including taxes and profits of the business.
Failing to Turn Data into Information
One of the most vital uses of financial data is to make informed business decisions. New business owners can sometimes fail to turn valuable financial data into key information.
Keeping accurate accounting records will lead you to create valuable data. You’ll then be able to turn that quantitative data into qualitative information. For instance, you can evaluate the business profitability by measuring the operational efficiency to improve margins.
Not Managing Cash Reserves
Liquidity is critical for any business, often more valuable than business profitability. Failing to preserve cash or arrange cash resources on time, is a costly mistake made by new business owners.
Steady cash flows streamline a business’s working capital needs. Thus, it improves the operational efficiency of the business. Without sufficient cash flows, businesses often have to opt for debt financing that increases the costs of doing business.
Many businesses struggle with cash at the time of tax filings as well. It’s a common mistake made by many business owners that proves costly in the long run.
Failing to Invest in the Right Tools
Investing in the right tools from the beginning can save you significant money in the long run. For instance, many business owners do not find the need of investing in accounting software or outsourcing the function in the beginning. As a result, they fail to comply with tax obligations as well as lose profits.
It’s important to utilize scarce business resources in the beginning wisely. For instance, you can seek help from a professional on hiring in-house v outsourcing. Similarly, you can work with your accountant on lease v buy decisions on equipment or vehicles.
Not Hiring an Accountant at the Beginning
One of the biggest mistakes made by new business owners is not hiring a professional accountant in the beginning. They outsource the accounting tasks to someone that lacks the expertise to manage the accounts efficiently.
