When you’re establishing a new business, you tend to make mistakes. Sometimes, these mistakes can cost your new business a lot of time and money, and can even lead to business failure. According to a report by Failory, more than 9 out of 10 startups fail. In fact, half of all new businesses fail by the end of the fifth year.
Want to prevent business failure and costly mistakes? Let’s take a look at things not to do when establishing a new business.
Which Things Should You Avoid Doing as a New Business Owner?
Here’s what you need to avoid doing as a new startup owner:
1. Starting Without a Business Plan
Establishing a new business without a plan means that you’re planning to fail.
To avoid failure and increase your chances of building a successful business, you should create a detailed business plan. It will help you understand and define:
- Who is your target audience?
- Which products or services are you going to sell?
- How will your product or service solve the problem of your ideal customers?
- Who are your competitors? What are they offering to consumers?
- How will you market your product or service?
- How will you fund your business till the breakeven point?
- What do you need to establish your business?
Answering all of these questions will help you vet your business idea thoroughly and prepare yourself to face the challenges ahead. You can hire a business consultant to guide you through how to conduct market research and create a solid business plan.
2. Ignoring Paperwork
You might come up with a business idea and randomly decide to establish a new business with a close friend.
When working with a friend, it might seem unnecessary to visit a lawyer and define your partnership terms and conditions in writing. However, that legal paperwork is important should anything happen with your partnership at a later stage.
That’s why you should always register your business as a legal entity type and create relevant agreements and contracts to define the ownership, roles and responsibilities, and financial liabilities of each partner/owner clearly.
Establishing a new business as a legal entity on your own may seem challenging. Therefore, you should take advantage of the state and federal filing service of GovDocFiling to complete the registration process. They offer expedited processing and send all important legal documents via email.
3. Spending Too Much Too Early
When you’re establishing a new business, it might be tempting to spend money on office decor, equipment, hiring employees, and more. However, that’s not the best thing to do.
As a startup owner, you should always start small with minimal resources and expenses. Invest money only in the things and people you actually need to grow your business, at least till the breakeven point.
For example, if you’re establishing a product-based business, you should initially spend money on product development and pre-launch marketing strategies only. Once your product is launched and you start generating sales and revenue, you can spend money on other things that can help you boost the sales further.
Similarly, as a service-based business owner, you need to focus on finding clients and generating revenue. Things like a fancy office and a huge team can wait.
4. Raising More Capital Than You Actually Need
While raising more capital may seem tempting, it can be the biggest mistake you make as a new business owner.
Before you approach an investor, you should:
- Have clarity about your business plan and product.
- Have a financial plan that defines how much money you need and how you are going to use every single penny. Don’t forget to mention how many returns you estimate to generate and by when.
- Have enough confidence in your product and marketing and sales strategies.
Remember, if your new business fails without outside investment, you’ll only lose your savings. However, if it fails after you’ve raised money from investors, it will lead to debts and sleepless nights. That’s why it is a good approach to use bootstrapping to build your business on your own.
If you need to raise capital, you should only raise as much money as you actually need to build your product and start your new business.
5. Not Keeping Accurate Records
Record keeping is a crucial step when establishing a new business. You should separate your business income and expenses from personal finances right at the onset of your new business.
If you fail to maintain proper records of your business finances, you might have to face the following consequences:
- Pay extra taxes if you don’t keep receipts for tax-deductible expenses.
- You may need to pay costly penalties if your business income tax reports and paperwork fail to match.
- If you don’t maintain records of employee onboarding and termination, you may face employee lawsuits. You should keep a written record of important employee communication and sign proper contracts and agreements with them.
- You will be unable to showcase company growth to investors and prospects if you don’t keep important income statements, balance sheets, and cash flow statements.
When establishing a new business, make sure that you prioritize and streamline your record-keeping process.
Ready to Establish Your Business Successfully?
When establishing a new business, you should avoid these pitfalls and prevent your company from suffering losses or failing. Make sure that you plan out everything in detail and build your business step by step.
Taking it slow will ensure that you’ve got enough time and flexibility to pivot to a different idea, product, or marketing strategy. Adapting to changing market trends is the key to building a successful business.
Do you need help establishing your new business as a legal entity? Connect with our business formation experts for help in the comments below.