The Prevent Defense

 

Rookie Mistakes

Starting a business can be very exciting. Most successful business owners still remember the day they handed out their first business card, scored their first sale or dropped their first dollar into the till. Others can only recall how things went from good to bad, to worse. Sadly, eight out of 10 new businesses don’t survive, largely because the owner committed one or more rookie mistakes running their business.

With proper planning, you can avoid some of the rookie mistakes even great players make, if you:

START SMALL
If you’re doing a service business or just starting out selling products, you may not need a traditional office or retail space. Think about ways that you can start small so you can keep overhead costs low while leaving room to grow. That said, be sure to cover growth strategies in your business plan. Identify targets or milestones that will let you know when expansion may be in order. It’s far easier to make more money in a small place than stretch scarce dollars in a cavernous space where receivables are lagging behind orders.

PROTECT YOURSELF
Depending on your business model, you may want to think about going with an LLC or a corporate structure. These structures afford you a little more protection should things go south and you need to settle some debts. Keeping your business and personal accounts separate can also keep creditors from trying to access your personal assets and accounts. Keep in mind that having a business in your home may affect your liability. Most homeowner’s policies don’t cover workplace injuries or any other liabilities incurred by your business. Talk to an attorney so you can be sure that you’re covered in the event of an accident or a disaster.

BE OBJECTIVE ABOUT YOUR BUSINESS 
It’s easy to get caught up in “busyness,” not business, when you start out. Spending your days looking like a business doesn’t generate sales or income. If you spend your days setting up your workspace, organizing your files, torturing over business card designs or surfing the Internet, you’re doing busyness, not business. Ideally, everything you do in your day should relate to getting sales, filling orders, completing projects and collecting money for those sales. Know what your hard business costs (rent, payroll, etc.) and your soft costs (office supplies, travel) are so you can be sure that your cash flow stays positive.

PAY YOUR BILLS AND TAXES ON TIME 
When cash flow falls behind, it’s easy to put off paying your bills. Don’t do it! You will lose the trust of your vendors who may have given you liberal payment terms and your credit rating may take a hit, especially if you’re a sole proprietorship. When it comes to taxes, nothing is worse than receiving a letter from the IRS or the state informing you that you are in arrears. The penalties and interest will only put you farther behind. If you can’t pay on time, don’t wait for a letter. Be proactive and call those you owe money to and see if you can work out a payment schedule.

PAY YOURSELF LAST AND LEAST
It’s great that you want to make money in your business, but the owner is typically last in line to get paid. Be conservative with your salary, especially in the beginning. A new business requires a lot of capital and you want to be conservative with every expense, including your own paycheck.

FIND A VETERAN
For the novice, running a business can be akin to wandering down the playing field without knowing where the goal line is. A business veteran, someone who has been-there, done-that, can be a godsend, helping you avoid the pitfalls that every new business encounters.

BRING IN EXPERTS
While you’ll wear many helmets out of necessity, especially in the beginning, realize that you can’t do it all. A great team relies on position players who are specialists. These specialists include accountants, marketing pros, web designers, attorneys – the list goes on. Use them. You can have the best product or service in the world but if your stationery was designed by the guy who does the church newsletter as a favor, you may never make the cut.

HIRE COMPLETE STRANGERS
It might be tempting to hire family members or friends, but this can spell doom, not only for your business but your relationships. It’s tough to be the taskmaster when it’s your son, wife or best friend who isn’t doing the job they were hired to do. It’s worse if you have to lay them off or fire them. While it’s ultimately your call, you may want to hire a highly qualified stranger to fill any needed roles.

 

All-Pro Or Benchwarmer?

Just because you’re in business doesn’t mean you’re really a business. As noted, “busyness” can look very businesslike, but it is the shortcut to ruin. Ultimately, the IRS may have a save as to whether your business is a business or merely a hobby.

Here are some of the guidelines they may use in making this determination:

  1. Does the time and effort put into the activity indicate an intention to make a profit?
  2. Does the taxpayer depend on income from the activity?
  3. If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the startup phase?
  4. Has the taxpayer changed their methods of operation to try to improve profitability?
  5. Does the taxpayer or his advisors have the knowledge needed to carry on the activity of a successful business?
  6. Has the taxpayer made a profit in similar activities in the past?
  7. Does the activity make a profit in some years?
  8. Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

The general rule of thumb is that you need to make a profit at least three of every five tax years, including the current year. Intent to make a profit is important since no business can guarantee they will be profitable, especially in the first few years.

It’s highly recommended that you meet with an accountant or CPA to discuss your business and its income-generating requirements so that your business continues to be classified as a business and not a hobby.

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