According to a recent study conducted by the United States Bureau of Labor Statistics, about 20 percent of small businesses will fail within their first year. When you consider that there were about 30.2 million small businesses in the country as of 2018, you can begin to get an idea of just how serious this situation is. It means that every year, about 6.04 million small businesses celebrate their grand opening... and their “going out of business sale” within the next 365 days.
Yes, it’s true that some of these were doomed from the start — either they were a product in search of a marketplace, or their potential audience just wasn’t as large as those entrepreneurs initially thought it was. However, many of these small businesses prematurely shutter their doors because their founders fell into a series of traps that are all-too-common during this fragile time.
Recently, we posed a very simple question to a number of financial professionals and other experts: “What are the most common mistakes you see when businesses are just starting out?” Their responses are enlightening for two reasons. The first is that they illustrate just how overwhelming this period can be in the life of any entrepreneur. The second is because they also outline how easily many of these mistakes can be avoided by partnering with the right financial professional in the first place.
The Biggest Mistakes to Be Aware of When You’re Just Starting Out
Mat Piamonte of F&M CPA, LLC, said precisely that, stating that the most common mistake he sees is: “not engaging or working with a CPA at the outset of the business, before the business launches.” He went on to say that, “businesses can fail within the first year if there is no proper planning, budgeting and forecasting. You can do these yourself, of course, but the chances are high that you will not be able to create a complete plan, and you could easily miss very important items if you’re not working with a CPA.”
David Robson of Premier Tax and Business Services echoed those sentiments, but from a slightly different angle. He said that “tax planning should be part of the business startup process. Failing to properly account for taxes can cost thousands of dollars in unnecessary taxes in the years to come.”
Tyrone J. Taylor of Nashville Tax Relief also agreed, taking a “bird’s-eye view” approach to this topic. He said, “most startup businesses have to be more diligent in determining what their financial obligations actually are. They look at their revenue as determining their success WITHOUT taking into account all their expenses... namely, taxes.”
Staying Out of Trouble Before You’ve Even Started
Allen Lenth of Executive Tax Solutions said that there are actually three key traps that he commonly sees entrepreneurs fall into, all of which can be avoided with the right perspective. “First, they spend too much time behind the computer instead of meeting their clients and making them happy,” he said. “Second, they buy too much, too early — all in the name of ‘progress.’” He indicated that the final mistake was ultimately a matter of discipline: “They refuse to check their books on a daily basis.”
That last point is particularly important, as it generates a much-needed level of visibility into what is actually going on. If you’re aware of a small issue today, you can stop it before it has a chance to become something far bigger (and more expensive) down the road. This can’t happen if you’re not paying attention in the first place.
Bruce Hacking of Hacking CPA and Associates, LLC, said that many of the common problems he sees start small but could turn into something bigger and far more expensive before you know it. “Two of the most common mistakes I see when businesses are starting out are not choosing the right entity and not keeping track of all their startup expenses,” he said. “When starting a new business, I highly recommend working with both your attorney and your CPA. These two professionals should work together to make sure that your legal entity correctly fits your needs, as well as your taxable entity.”
But it was perhaps Cliff Davis of Davis & Langford CPAs who said it best when he said that the number one mistake he wants people to avoid is, “not involving an outside accountant in the startup.” He went on to explain: “one hour with a professional can save you thousands in taxes and operating costs.” This will also help avoid a number of other problems, like “getting bogged down in administration instead of growing the business.”
Are all of these issues serious (and potentially fatal) for even the strongest of new businesses? Yes — but it’s also important to keep in mind that a problem is just a solution waiting to be found. The lion’s share of these issues can be circumnavigated entirely by partnering with the right professional early on in the process, paving the way for years of innovation and success instead of heartbreak and failure like so many others.
Lee Reams II, writes for CountingWorks, an accounting news and advice website. Reach him at [email protected] or on LinkedIn.
About Lee Reams II
I am a tax and business news junkie who has spent the last 20 years developing and executing "best in class" word-of-mouth marketing campaigns for tax and accounting professionals. With TaxBuzz and CountingWorks we have taken that same commitment to quality content directly to the consumer. Keeping you up-to-date with the latest tax law changes, business growth tips and planning strategies to help you reach your best financial outcome.
