Naturalist Charles Darwin famously said, “It is not the strongest of the species that survives; it is the one that is the most adaptable to change.” What is true for members of the natural world has never been more true for the small business owner. Stop-and-go government regulations and rapidly changing economic conditions have given small businesses plenty to adapt to this year, but these same conditions also provide many opportunities. Success is within reach, but it takes the right approach to avoid the pitfalls. Leaders must focus on revenue, but why a business fails to survive often has less to do with revenue and more to do with blind spots. Specifically, there are six common mistakes that generally lead to catastrophic business failure.
Lack of financial planning leads to many problems, which often start before the business even generates any revenue. Startups are notorious for underestimating the capital needed for the first six to 12 months of operation. Last year provided unique funding opportunities with Paycheck Protection Program small business loans, but there were so many businesses that did not qualify due to lack of financial records. Many also had income tax returns that focused on creating a zero-dollar tax liability instead of accurately reporting the result of operations. Businesses must plan not only the occurrence and timing of financial inflows and outflows, but also the resulting tax and cash flow implications. Planning prepares leaders with the funds needed to pay tax liabilities and address in advance any forecasted capital limitations.
Failure to budget can occur even when a business starts with the appropriate financial planning. Rapid growth can be one of the leading causes for lack of budgeting. Entrepreneurs frequently fail to use information they have on hand to build budgets that can inform decisions to invest or cut costs and empower their ability to scale. Cash flow woes are the first warning sign that a business needs to adjust its budget. Being prepared allows a business to continue operating successfully despite bumps in the road. In the end, a business will struggle to grow without proper budgeting.
No marketing plan is a surprisingly common shortcoming. Counterintuitively, entrepreneurs with a big vision often underfund marketing activities. Many of them have a few favorite tactics they plan to use, but a comprehensive marketing strategy is needed to help drive sales in highly competitive conditions. Entrepreneurs also erroneously view marketing as an expense instead of an investment, making it the first thing cut in tough times. Generally speaking, the marketing investment is directly related to a business’s projected increase in sales. If the expectation is conducting marketing activities will increase sales, then why cut them during tough times? A professionally prepared and well-funded marketing plan will help ensure the business’s value proposition is sustainable in a boom or bust cycle.
Lack of separate bank accounts for personal and business purposes is a frequent oversight for small business owners. They co-mingle funds, creating unintended financial, tax and legal liabilities. Business owners should seek professional accounting and tax advice to separate their accounts and correct the situation right away.
Unqualified business advice is everywhere. Most business owners are instinctive leaders and frequently seek input from others for important decisions. However, the source of advice for a business owner is crucial. There are unintended consequences in taking strategy, tax and financial advice from family and friends instead of a qualified professional. It can hurt revenue and even create costly tax liabilities. Business owners should have a trusted inner circle from whom they receive guidance, but they must balance that with the counsel of a professional before making business-related decisions.
Not understanding how and when to utilize an LLC is one of the most common new business blunders. There is an entrepreneurial boom taking place in conjunction with the growth of ecommerce across the country. Many follow online advice and form an LLC for their new business, but without understanding how an LLC is taxed. They file their returns incorrectly, creating tax debt and liabilities that sit like a ticking time bomb until uncovered by an audit from the IRS! It is important for the business to be properly structured upfront, but even if there is an unfavorable set-up, it still may be possible to get things corrected with qualified legal and tax advice.
Gena Jones is an attorney, CPA, Certified Tax Resolution Specialist and a Business Coach based in Chandler, Ariz. She represents clients before the IRS and helps entrepreneurs write their business success stories, ensuring they have the proper succession and estate plans in place. Jones has a master’s degree in management from Harvard University; and a master’s degree in tax law/taxation and a juris doctorate from Chicago-Kent College of Law, Illinois Institute of Technology.