Ten Missteps That Can Put You Out of Business – And How to Avoid Them
by Barbara Weltman on August 14th, 2007
Getting started
1. Not setting up your business entity correctly.
From a legal and tax standpoint, there are various ways in which you can set up your business, including as a sole proprietorship, partnership, limited liability company (LLC) (or for professionals, limited liability partnership, or LLP), S corporation or C corporation. The type of entity you select will affect:
*Exposure to (or protection from) personal liability. Owners who are sole proprietors or general partners in a partnership have no protection from personal liability; if the business is sued, you risk losing not only the business but also your home and other personal assets.
*Taxation. The income tax rate paid on your profits depends on how your business is organized. The more you have to pay, the less you have to reinvest in the business to see it grow. If the business is a pass-through entity where you’re taxed on your share of the profits – such as a sole proprietorship, partnership, LLC or S corporation – the rate you pay is based on your overall personal income (including your share of business profits). In 2007 you can pay up to 35% on your business income. In comparison, C corporations are separate taxpayers with a top tax rate of 35%, which applies only to very large corporations (although personal service corporations, including professional corporations, pay a flat 35% rate), but smaller C corporations may pay only 15% or 25% on their income.
*Audit risk. While size matters (e.g., very large and very small companies on an asset or gross receipts basis are more likely to be audited), the type of business entity you own also affects your audit risk. Sole proprietors, for example, are more likely to be audited than owners who have incorporated. Audits can result in assessments of back taxes, interest and penalties that can cripple a business.
2. Not raising enough capital to sustain you. The lack of money – from investors, lenders or your own resources – is, perhaps, the number one reason why businesses fail. Make sure you have enough capital on hand to carry you through the start-up phase or difficult periods in the life of your business.
Idea: Arrange for lines of credit when your company is doing well so the money will be there in times of need. Establish business credit and get your own credit history in shape to make it easier for your business to borrow money.
3. Not writing a business plan.
Even if you’re not Shakespeare, you have to make a blue print for your business detailing what you plan to do and how you plan to accomplish it. A business plan is a necessity if you need to borrow money or raise capital from investors. For assistance on how to write a business plan, visit the Small Business Administration at www.sba.gov.
Operations
4. Not correctly setting your prices.
The price you set for your goods or services must be sufficient to generate a profit; getting sales isn’t enough if you’re actually losing money on each sale. In order to determine your prices, you need to know how much it costs you to sell.
Idea: Raise the price of your goods or services to keep pace with changes in your overhead and other costs (e.g., higher energy costs and interest rates). Don’t be afraid that higher prices will drive business away. Of course, keep a close eye on your competitors so that you don�t price yourself out of the market.
5. Relying too heavily on one customer. Cervantes was correct about not putting all your eggs in one basket – doing so is just too risky. A major customer or client may demand the bulk of your time and attention and pay you handsomely. But don’t ignore the need to continually broaden your customer base so that you’re not left high and dry if the big customer cuts back on its demand or leaves you.
6. Not monitoring your inventory.
Two aspects of inventory management can doom you – buying too much so that you overextend your capital or buying too little so that you can’t meet customer demand and you lose the sale.
Idea: Keep track of inventory, using computer records or other methods to ensure that your count is correct. Take a physical inventory periodically to verify your numbers (and to make sure there has been no employee theft).
Cash flow
7. Not monitoring cash flow.
Understanding your cash flow cycle – the period from buying the material, to making the products or buying them from suppliers, to selling the products and, finally, receiving payment – is critical to the survival of your business. You need to have the money on hand to pay for materials or inventory items before you make the sale and collect the payment.
Idea: Stay on top of your accounts receivable – an important part of your cash flow cycle. The failure to promptly collect outstanding receivables can mean you’ll never collect them at all; the older they become, the smaller your chances of recovery.
Marketing
8. Not marketing your goods and services every day in every way.
Whatever your type of business – from selling a cup of coffee to consulting on nuclear energy projects – take every opportunity to sell yourself.
Idea: Hand out business cards wherever you go. Join local chamber of commerce or other organizations to network with others in your community. Use online business communities to network on the Web.
Strategic planning
9. Not having an emergency plan.
Things happen and you need to be prepared. Storms, illness, electrical outages, or acts of terrorism can disrupt your operations. Put backup plans in place so you can keep going. Carry business interruption insurance to pay bills even if the business is temporarily shut down.
10. Not having a succession plan.
What happens to your business if something happens to you? If you’re the heart and soul of the company, your retirement, incapacity, or death could spell the end of the business. But plans can be made to successfully carry the company through a transition into a new era following your departure.
Idea: Assemble a team of experts – at least a banker, accountant and attorney – to work with you in every phase of your business.
