Starting a business is exciting. Suddenly, you are pursuing your dream and hoping to make money in the process. But according to Bloomberg, eight out of ten entrepreneurs who start businesses fail in the first 18-months. What can be done to prevent your own failure? Here are three major pitfalls business owners find themselves in.
1. CAPITAL – in capital letters
It is no secret that many entrepreneurs grossly underestimate the amount of capital it will take to get a business up and running, but start-up costs are not the only capital needs of a business. Once the business begins to make money, what do you do with the capital? How do you reinvest it? Where do you reinvest it? When?
Never underestimate the power of planning. Sitting down with an accountant and a successful mentor will not only lay out what your start-up costs will be, but it will also generate ideas for how to acquire the capital required for initial success. Furthermore, the planning phase can help you create both short- and long-term strategies for growing the business. Short-term plans will include how to build a cash cushion separate from operating costs that you can access when the unexpected comes along. Long-term strategies for reinvestment will help you resist the temptation to reinvest every dime into bigger office space, more staff, or better technology along the way. These strategies provide direction for every capital decision from expansion to raises. Which brings about the next point.
2. Hire the right people and pay them what they’re worth.
Never assume that your passion for your business is contagious. The temptation with start-ups is to hire motivated people who buy into the idea, then pay less than market value with the promise that, if the product takes off, their pay will increase exponentially with the success of the business. Not only does this lead to employee burnout, you run the risk of losing your best employees to better-paying organizations once they have been trained. In the long run, hiring the right people to do the right job, and paying them well not only saves time, but ultimately money.
When you consider all of the costs associated with employee turnover – hiring, training, reduced productivity, etc. – it costs between 30 and 50 percent of an entry-level employee’s annual salary to replace them. That figure jumps to 150 percent of a mid-level employee’s annual salary. All things considered, spending precious capital and time on the wrong employee seems fool-hardy at best.
3. Hire an accountant and don’t just talk to him or her at tax time.
Most entrepreneurs do not have accounting experience. It is common to find an entrepreneur who has a great idea, and enough capital to start a business, but who ends up in a bind because he or she fails to seek the help of a financial professional. Even many who hire an accountant only talk to him or her when they receive a notification from the IRS.
Not only does your accountant see your business in dollars and cents, he or she can help you make sense of those numbers. By including your accountant in quarterly reviews, you are gaining valuable insight into whether you are reaching your short- and long-term goals. Do you have enough cash flow? Is your accounts receivable up to date? Do you need more capital?
Furthermore, looking at previous earnings and expenditures can also help you predict your future. Using data from your organization and trends in the market, your accountant can help you decide when to take on partners or investors, how to plan succession in the organization, when to sell the business if you choose to, and when to expand into other markets.
Ultimately, success breeds success. Surrounding yourself with successful mentors and competent financial professionals, committing to short- and long-term planning, and following through with those plans will mitigate many of the common financial mistakes business owners make. While there is inherent risk in entrepreneurship, more often than not it is the risk that makes the process fun.