The 13 Self-Inflicted Failures Small Business Owners Experience (and How to Prevent Them!)
I recently spoke on a panel to small business owners and presented this material which was cleaned from an interview I had with an excellent attorney in my community (who also happens to be my father,).
Charles Davis is a senior partner at the law firm Davis Miles. He says that just knowing these common mistakes before starting a business is the first step to steering clear of them.
While many of these suggestions business-specific, they are good advice to all people who are looking to live more productive and fulfilling lives.
The suggestions below are not legal advice. Moreover, they are my notes from my interview, so some concepts or meanings may have been lost in translation.
1. Failure to get an Accounting System set up
a. Find a good accountant to help you set up QuickBooks or some other small-business accounting program.
b. Outsource your accounting. Get a good accountant right from the get-go, one who will get your accounts structured in a way that will give you useful information. Use one who understands your business. Ask people in similar business to yours who they use for their accounting (i.e. if you have a plumbing business, ask building contractors for accountant recommendations). Doing your accounting yourself saves money in the short term and gives you more of a sense of your business strengths, but it takes away from time you should be selling and marketing.
c. Don’t run your business out of a personal account and don’t ever mix personal funds and business funds.
2. Failure to understand all components of the business
a. A business is multi-faceted and owners need to understand and have at least some level of competence in finance and accounting, legal, marketing, facilities, staffing, distribution, customer service, and supplies.
b. If you’re weak in an area, seek out an expert; if you are short on funds, ask your friends who are strong in these areas or who work in these professions for advice.
3. Failure to choose the right form of business entity
a. The type of business entity you select with have implication about what kind of personal liability you have for the business, and will determine what kind of taxes you’ll pay; good attorneys and accountants can save you far more than you pay them to set up your organization, because they’ll help you avoid payment of unnecessary taxes and help you shield yourself from unnecessary liability exposure.
4. Failure to get licensed
a. Don’t operate your business illegally. It makes it hard to get legal recourse when your business has been wronged if you have skirted the rules yourself when setting up your business.
b. You need a Federal Tax ID number (for all entities except a sole proprietorship)
c. You need to get City and State Sales Tax Licenses to sell products in a given municipality and state.
5. Failure to protect intellectual property
a. Copyrights, trademarks, patents and trade secrets are all assets; the theft of these by other companies can put you out of business.
b. If you create something original, see an intellectual property attorney to help you protect that creation.
6. Failure to understand the role of technology
a. Technology doesn’t solve problems. It is a tool that can be used to help you to solve problems. But it can also be a problem. Make sure that the technology actually saves you both time and money. If it costs you more in time and money to implement and use the software than in saves you in time and money, then it’s a bad investment.
b. People can get so enamored with spreadsheet modeling of the business that they fail to execute the plan. Additionally, the real world will usually not resemble the world you model on spreadsheets, so be conservative in your estimates.
7. Failure to hire the right help
a. Hiring poor help can sink your business. Don’t hire family and friends just because they’re family and friends.
b. Also, don’t hire “charity cases” because someone “needs a job” - at least, don’t put these kinds of individuals into core areas of your business, and if you do hire them make sure there is regular accountability, training and supervision. Your good intentions may result in you, and others, being out of work all because you’re trying to force a bad fit into the mix.
c. Be very careful hiring relatives. The family relationship is most important. Work conflicts between family members can jeopardize family relationships.
8. Failure to keep work at work
a. Don’t bring work home if you can avoid it. Don’t talk work at home if you can avoid it. Working at home and talking work at home, especially about work stresses, can transmit stress to family members unnecessarily and paradoxically make you less effective at work.
9. Failure to manage business relationships with friends, family, neighbors and other affiliates
a. Remember that any business relationship can sour and have conflict.
b. Many excellent business people refuse to do business with family, friends and neighbors to prevent any situation in which a falling out over business would affect harmony with their personal lives.
10. Failure to borrow the right amount
a. Don’t borrow too much. Don’t borrow too little. Borrow what you need and what you can afford to pay back (estimating conservatively). Don’t borrow if you don’t have to.
b. Get a good accountant to help you figure out the right amount to borrow.
11. Failure to estimate employers responsibility for FICA tax and unemployment insurance
a. When creating budgets for employee expenses, don’t forget the extras you have to pay to the government on behalf of the employee.
12. Failure to insure
a. Insure yourself, your business operations, and your facilities.
13. Failure to understand tax consequences of owning your own building
a. If you are going to own a building or office space, rather than leasing it, make sure you understand what that ownership will do to your taxes.
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