5 Mistakes Small Business Owners Should Avoid

The number of small businesses in the United States continues to rise.  In fact, according to the U.S. Small Business Administration, there are 33.3 million small businesses employing an additional 61.6 million people across the country.   While the importance of small business and entrepreneurship to our economy cannot be overstated, being a small business owner has not gotten any easier.  In fact, prior research by Harvard University’s Shikhar Ghosh suggested that 75 percent of venture-backed startup firms fail while data from the Small Business Administration (SBA) notes that only 50 percent of all newly established businesses survive five or more years. While the challenges facing small business owners are numerous, addressing some of the most common financial mistakes may help improve a business owner’s probability of success.

Not knowing your numbers

Shark Tank’s Kevin O’Leary (better known as Mr. Wonderful) has chewed out many entrepreneurs for not knowing their numbers.  And for good reason – “knowing your numbers” is one of the most important aspects of successfully running a business.  From cost of goods sold and profit margins to variable costs and breakeven points, many business owners do not have a good handle on the economics of their business.  Why are the numbers so critical?  Because when used effectively, they are a point of clarity and the basis for virtually every decision a business owner makes.

The challenge is knowing which numbers are the most critical to your business.  While there are common profitability metrics every business should know, there may be more specialized numbers that are more crucial to certain types of businesses.  Consider working with your CPA or a business coach to explore which ratios and numbers you should focus on.

As O’Leary notes, “ If they don’t know the numbers, they don’t know their business.” Knowing your business and your numbers will only improve decision-making and future outcomes.

Failing to invest in the right people

Investing in the right people is no easy task.  (Notice I said investing.)  One of the biggest mistakes business owners make is looking at their team as simply a cost.  Viewing employees as an expense often leads entrepreneurs to “hire behind the curve” or later than they should.    While it is important not to hire too early either, finding the optimal balance is critical.

Culture is also crucial and building the right team can be the difference between success and failure.  Investing in the right people also means helping them to develop and improve their skills so they become an even greater asset.  As Sir Richard Branson said, “Train people well enough so they can leave, treat them well enough so they don’t want to.”


Under capitalizing the business

We have all heard the expression, it takes money to make money and when it comes to running a small business – this is often true.  Too often, small businesses underestimate the amount of working capital they should have on hand for operations and expansion.  Having sufficient business reserves or access to lines of credit can be critical during both periods of expansion and contraction – especially in the case of economic weakness.  While the economy may be strong today, it is critical to have sufficient capital to handle the financial curve balls that might be thrown your way.  Consider planning for worst-case scenarios when considering capital requirements and always have a plan b.

Forgetting to stay ahead of tax liability

As businesses grow over time, many owners fail to keep a close eye on new tax responsibilities.  From payroll taxes and sales taxes to state and federal income tax payments, many businesses are so busy with day-to-day management that they fail to plan properly in this area.  Tax liability can spike during periods of rapid growth, often leading to giant tax surprises in the future.  Outsourcing works well here, and proper planning with a qualified CPA and bookkeeper can help ensure you have a good handle on the various tax liabilities that a business owner may be responsible for, ultimately limiting future surprises.

Failing to plan for the future

Michael Gerber, the author of the classic business book The E-Myth notes, business owners often “work in their business rather than on their business”. The fact is, entrepreneurs often get stuck in the “weeds” of the day-to-day management and operations of the business, failing to think strategically about how they can leverage their business to improve their personal finances.  Specifically, many small business owners end up being extremely negligent when it comes to thinking about future retirement savings.  Unfortunately, only 44 percent of small businesses offer 401(k) plans and even fewer offer defined benefit pension plans.

Why aren’t more offering a plan? Many business owners incorrectly assume that establishing a new 401(k) plan is costly.  Not only can a small business establish a low-cost 401(k) plan that is just as effective as a Fortune 500 company, but it may also receive significant tax benefits and deductions as well. (Not to mention the benefits of retaining key employees.)   From selecting the right retirement plan for your needs and choosing providers to the implementation of the plan and monitoring results, an independent advisor who specializes in this area can help ensure you are taking steps toward planning for the future financial goals of both owners and employees.

Running a small business can be both rewarding and challenging.  Knowing your numbers, investing in the right people, properly capitalizing your business, planning for tax liabilities, and planning for the future may help you leverage your business to impact your personal financial goals positively.  Since everyone’s situation is unique, consider speaking to your legal, tax and financial advisers to determine the most appropriate approach for you.

Kurt J. Rossi, MBA, CFP®, AIF® is a CERTIFIED FINANCIAL PLANNER & Wealth Advisor.  He can be reached for questions at 732-280-7550, kurt.rossi@Independentwm.comwww.bringyourfinancestolife.com & www.Independentwm.com. LPL Financial Member FINRA/SIPC.