Being an entrepreneur means wearing many hats. Most of us start with a creative passion or deep expertise in a certain area, and have to learn the rest as we go. Most of us are making small mistakes along the way without noticing, and sometimes these pesky little mistakes add up to larger costs in the long-run.
Here are a few of the mistakes I’ve made, and corrected, since starting my first business all those years ago.
Not paying your state and federal taxes quarterly
Did you know in the US you most likely* need to pay your state, federal, and city/county taxes quarterly if you are self employed?
It’s an annoying amount of paperwork but if you fail to file you will be paying penalties at the end of the year on the amount they think you earned . The good news is it’s easy to do the paperwork yourself each quarter and send in your payment. If you overpay it will all shake out at the end of the year and you will get a return. It’s better to be safe than sorry. See crucial forms and information here.
*check your city and state for specific requirements, some cities require monthly payments (ex. City of Scottsdale)
Making decisions without understanding the cash flow implications
On financial matters, don’t go with your gut.
Financial decisions should always be made with cash flow forecasts in hand. Make sure to have an up-to-date cash flow chart at all times so you can plug in numbers before pulling the trigger on a big investment!
Waiting for payment until the end of a project
Getting paid up front is a great way to manage long term business growth and cashflow. I’ll let you in on a tiny secret: If a client is not ok with paying a deposit or upfront payment for your services, run far away! They will not want to pay later and bleed your time while you wait for your fee to arrive. Don’t be afraid to ask for upfront payment- it is vital to your growth and the right clients will understand that.
Not tracking shareholder loans and draws, and adding interest
You should be tracking when you loan your business money and when you withdraw it! Did you know, your business can actually act as a bank for you, and pay you interest when it pays you back for a loan you put in? Track these ins and outs carefully.
It is also important when you put money in a company to classify it correctly. Is it a capital investment or loan? They are both treated differently. Loans must have a term interest rate, notes on how often the interest compounds - and be signed by the person loaning the money - and the receiving party (sometimes the same person is a single member or small company).
One big mistake I see often is small business owners overestimating their projections.
I am all about being hopeful and reaching for the stars but when it comes to financial projections being realistic will set you up for the most success. Once you have your realistic projections in hand, don’t forget to cross reference them weekly or monthly! Take a look to see where you have exceeded your goals or where you may have fallen short and need to make adjustments.
Not following a budget
It’s just equally as important that you track and understand your budgets on a daily basis. Blindly spending will get you in trouble! Be sure to account for variable expenses too - expenses that will increase or decrease alongside your workload. For example, for every new client there may be the cost of added freelance support, office supplies, travel, legal fees, onboarding costs etc.
Making long term staffing decisions when your team gets busy
Long term hires should be brought on when you have seen a trend that has extended more than 1.5 years. Otherwise bring in freelance and contract labor to help you through a busy time. Staff to your slowest periods, and sub-contract to your busiest. This will allow you to be nimble and adjust to the expected ups and downs of your business. Unlike permanent hires, contractors should be able to jump in immediately and be able to help/resolve a situation without too much prep. Set your business up in a way that allows for that type of easy integration.
Overspending on overhead, office space etc.
We all get excited sometimes and want to spend on a beautiful space or nice car. Overhead can truly kill a small business so try to stay lean. Look into great coworking spaces that exist with short term agreements that allow you to scale when the time is right. There are great benchmarking reports you can find online for free, tailored to your industry and business model that may be helpful in understanding average margins in your space.
Not paying attention to your banking fees
Bank fees can add up! Keep an eye on them and always be sure to check in with your bank representative to ensure you have the account plan that is best suited for your business. As your business grows and your transaction numbers climb, you’ll want to stay one step ahead. There are amazing online banking options that have zero fees for small business owners you should check out if your fees are creeping in to an uncomfortable terrain - Every to keep an eye on!
Confusing write-offs for discounts
Business write-offs ie. business expenses are great non-taxable fees that will come off the top of your income when it comes to tax season. They may help put you in a lower tax bracket, which is always a great thing. But beware: it is still real money being spent. They are not free discounts or coupons. Money is money. If you have it and need to spend it on something valuable for your business go for it! But, if you don’t then it is just dollars poorly spent.
To truly understand write-offs be sure to research your deductions specific to which type of entity you are (sole proprietor, LLC, S Corp, or C Corp). Here is a more in-depth guide.
Underestimating employer tax
So you’ve set yourself up and maybe a few team members on payroll? Watch out for those taxes. They can be extreme and gut wrenching if you’re unprepared. Expect to pay anywhere from 7-15% on your payroll sums. Also, be careful when calculating payroll for yourself and any employees because if you mess up, it is the responsibility of the individual, at the end of the year, to pay any penalties and interest on underpayments. If you are uncertain, you can always turn to a third-party payroll provider for assurances.
Lacking solid contracts and collections measures
People will try to not pay or delay payment when they can - all businesses are faced with these types of clients. Be prepared for late payments and have a process in place. Have solid contracts before starting any work to protect yourself and a follow-up plan that allows you to notice and escalate outstanding payments quickly. Escalation may look like alerting your lawyer to issue them a previously drafted letter or working with a collections agency, whatever it is be ready and don’t back down! Get that money.
Allowing scope creep
If you run a service based business, it’s very important to define the scope of the project at the beginning. The scope of a given project allows you and your staff to prepare, delegate and deliver in a timely fashion. Scope allows a project to remain defined and it keeps deliverables realistic. Sticking to the scope allows you to be profitable. Clients will try to get you to bend outside of the agreed upon plans and strategy and this can cost you hours of work you’re not getting compensated for. Your time is money. Upcharge clients who ask for more and be ruthless about it!
Best of luck growing your business!
This article originally appeared in Women On Business on June 3, 2018