Here’s a sobering statistic: only half of all small businesses will still be up and running five years after their start. Chances are if you’re starting a venture of your own, you’ve heard plenty of cautionary tales that illustrate this stat, but very little practical advice on how to beat the odds.
While some aspects of success are dependent on factors that are outside of your control — most notably, changes in the economic climate after you’ve launched your business — there are some steps you can take to stack the deck in your favor, and some pitfalls to steer clear of.
Read on to learn about the most common business planning mistakes made by entrepreneurs and small business owners, so that you can avoid going down the same path.
- They Don’t Write a Business Plan
There’s a misconception out there that business plans are only necessary for business owners who need to secure funding from a venture capitalist or financial institution. Nothing could be further from the truth. A business plan is a necessity for every start-up.
Think of the business plan as a blueprint, or a map. It will serve as a guiding force as you navigate the first few months, and even years, after starting your business. It helps partners and employees stay on the same page.
Perhaps most important of all, the research that’s necessary for writing a good business plan is going to be essential to understanding your market, your competitors, and your industry.
- They Choose the Wrong Structure
Should your business be a sole proprietorship, a general partnership, a limited liability company, an S corporation? These are just a handful of the options for how to structure a business entity.
When it comes to keeping your tax bills as low as possible, your best bet is to be taxed as an S corporation. There are two ways to achieve this. First, you can form an S corporation directly. However, if you choose to form a limited liability company, or LLC, you could also elect to be taxed as an S corporation.
The structure of your business is not a decision to be made lightly, so be sure to consult with your tax attorney or financial advisor before filing any paperwork.
- They Don’t Keep Their Business and Personal Financial Accounts Separate
Solopreneurs have enough to worry about without establishing a separate professional bank account, right? And what does it matter, since there’s no one else on the payroll? You could be forgiven for trying to simplify your financial accounts if you work for yourself, but you could be selling yourself short.
Maintaining separate banking for your personal and business accounts may seem like a hassle at the beginning, but down the line, you’ll thank yourself for putting in the effort. Keeping these monies separate will streamline things come tax time, make record-keeping a snap, and make it much easier to eventually incorporate.
- There’s No Financial Cushion
You’re champing at the bit to get going, no doubt, but don’t be so eager to start your business that you’re unprepared. It’s worth waiting a while to ensure that you have enough of a financial cushion to keep you afloat in lean times. Entrepreneurs who sink every single penny into a business, and/or count on turning an immediate profit, are setting themselves up for a huge fall.
No matter how much gumption or enthusiasm you have for your endeavor, it could be years before you’re in the black. Don’t put all your nest eggs into one basket.
- They Don’t Deduct Everything They Can
One survey from 2015 discovered that fully one-fifth, or 21%, of all small business owners don’t claim even half of their expenses as tax deductions. That is like literally throwing money away.
What qualifies as a business expense depends on your industry, of course, but there is absolutely no reason not to scour your records looking for every possible deduction. Or make the job easier from the get-go by using an expense tracking app. It’s as simple as snapping a pic of a receipt — the app will do the rest. Maintaining that separate business account, like we covered above, is another way to making writing off expenses as easy as pie.
Small business owners invariably have a lot on their plate, even before they’ve cut the ribbon on their new venture. There are times when it’s tempting to skip the research phase and dive right into operations, but learning as much as possible about the financial mistakes not to make will pay off — literally.