The “perfect” time to start a business does not exist. There is no such thing. And while starting a business, in general, is risky, starting one during a slow economy or a global crisis can be even riskier.
However, more than half of all startups actually survive to their fifth year. So what can you do to ensure your business is financially sound and survives in the long term? Here are some common financial pitfalls of starting a business and how to prepare yourself so you have a greater chance of success.
Pitfall # 1 — You Have Unrealistic Financial Projections
Keep in mind that you’re in a slow economy. You have to be realistic with the size of the prize that’s currently out there. What was once a profitable business a year ago, may not be so now. Make sure you have the right data and research to plan accordingly and make adjustments when necessary. Setting realistic financial projections for your new business involves:
- Doing proper market research: If you’re wanting to start a restaurant, doing so amidst stay-at-home orders and new pandemic-related restrictions may not lead to financial success. Find out what the industry data is saying for your desired business in order to have accurate financial projections. Use resources like gov to understand what the potential is for your business.
- Getting real about your expenses: Expenses add up quickly when first launching a business. Having an understanding of all of your potential expenses up front will help you plan accordingly. Use this Startup Cost Calculator to help you plan.
- Estimating conservative revenue: No matter what kind of business you are starting, you will want to dig into the data from competitors in similar growth stages as your business, predicted seasonal trends and other key revenue periods. You should pull data from your analytics and financial reports, industry case studies and other data sources to use as guidance.
Pitfall # 2 — You Do Not Get Business Insurance
While it’s too late to get business insurance to protect from financial risks of COVID-19, you can prepare your business for future catastrophes. Business insurance can be a safety net to help protect your business from a variety of risks, such as natural disasters, lawsuits, employee injuries, property damage and an unpredictable event such as COVID-19. Paying out of pocket for damages can bankrupt a company. Not to mention, some types of business insurance are required legally in the U.S. and in certain states. Failing to acquire insurance can prevent you from starting your business, lead to fines or you can lose your business license if you don’t maintain coverage.
The following types of business insurance are required:
- Workers’ Compensation: This provides benefits to employees who suffer work-related injuries or illnesses. This insurance helps pay for medical care and wages from lost work time.
- Unemployment Insurance: A federal program where eligible unemployed people can receive cash benefits for a specified period of time. These benefits are paid out of funds derived from employer, employee and government contributions.
- Disability insurance: This provides income in the event a worker is unable to perform their work and earn money due to a disability. There are many types of organizations that provide different types of disability insurance.
Pitfall # 3 — You Are Not Investing in Bookkeeping
Perhaps you’re tight on funds and decide to do the bookkeeping yourself in order to save some money. Maybe you’re using the back of the napkin math instead of using an accounting software system to help you. One small mistake on your part can lead to disaster, however. Your business needs accurate records for tax purposes, securing loans, paying employees and vendors on time, tracking money coming into the business and understanding the overall health of your business. Using a proper bookkeeping program or turning over the task to someone with expertise can give you peace of mind.
When looking for professional help, an accountant, a certified public accountant (CPA) or a bookkeeper will all be qualified. Common online bookkeeping software programs for small businesses include QuickBooks, FreshBooks, Zoho Books and Sage 50cloud.
Pitfall # 4 — You Fail to Budget
There are plenty of ways to receive financing when starting your business. Getting money is challenging, but it’s not the most challenging part — budgeting that money is. Whether you received a bank loan or used personal funds, fundraising, or venture capital funding, you need to spend your money wisely. Failing to budget the money that you do have will leave you in a very tough spot if you have tapped your financial resources dry and have no more funding to rely on. Components of a strong small business budget include: estimated revenue, fixed costs, variable costs, one-time expenses and a profit and loss statement.
Pitfall #5 — Not Hiring the Right People
During an economic crisis, there may be more people unemployed and looking for work. This is definitely a benefit when choosing candidates. However, with so many people needing work, the opportunity to get someone to work quickly and for cheap is higher. Hiring someone quickly and cheaply can be a long-term financial mistake because you may not be receiving the best work. This can lead to time and money spent redoing work, retraining the employee or hiring someone else, which ultimately holds your company back from reaching its full growth potential.
Using highly recommended referrals, using a recruiter and putting your candidates through a thorough vetting process can help you hire a qualified candidate who won’t cost you money down the line due to poor work.
Starting a business even during a critical time can be thrilling and rewarding. Coming armed with the right tools to avoid common financial pitfalls can help you achieve business success, no matter the financial climate.
Lisa Crocco is a marketer for an international food manufacturer by day and a freelance writer/marketer for startups and small businesses by night. She’s written for outlets like USA Today College, Career Contessa, CloudPeeps and Fairygodboss.