Small businesses are the backbone of the economy. Hundreds of thousands, if not millions, of small boutique producers, grease the wheels of the economy.
But poke beneath the surface, and there is something quite disturbing going on. In the US, about 80 percent of all startups fail in the first year. It’s a statistic of which most startup owners are well aware. And yet it’s a statistic that persists.
We all know that capitalism roots out the weaker firms. But even with competition, is an 80 percent failure rate really necessary? Probably not.
Startups have a lot more control over their future than the statistics admit. Often it’s the business idea itself that is bad. But some startups fail even though they have a good product. And usually, it’s because of poor financial planning. Here are some errors that startups make.
Failing to prepare for bad times
Startups tend to have a rosy picture of the future. And that’s understandable. Who wants to wake up in the morning and face the day with doom and gloom in the back of their minds? Not many people.
But having a sense that things really can go wrong is essential. Many small businesses don’t put aside any money at all for a rainy day. And few realise that to keep a business viable; it may be necessary to put aside enough money to keep a business operational for six months.
Often shocks to the economy can have a damaging effect on small businesses. One of the first things that people do is cut their discretionary expenditure. But it’s this discretionary spending on which small businesses rely. Weathering the storm requires clear thinking and financial planning. Times won’t always be good.
Accounting is one of those annoying overheads that all businesses must endure. But many small businesses fall into the trap of not keeping track of their financials on a daily basis.
Ask many small business people how they’re businesses are doing financially and they’ll say “alright.” And they won’t give any further details.
Often it’s only at the end of the tax year that they get any idea of their financial position. That means that if they do have any financial problems, it can be months before they even identify them.
It may also be worth building a relationship with a tax attorney. Taxes in many states for small businesses are a complicated affair. And often mistakes can creep in at both ends of the relationship.
Strike while the iron is hot
Those that own small businesses often don’t recognise opportunities to get hold of cheap credit. But when the market is up, that’s precisely the time when creditors are most likely to lend.
Secure funding in the good times and take advantage of low-interest rates. But just be sure that the rate of interest that you pay is fixed.
The IMF has recently warned that we could be on the verge of another financial crisis. And the banks may try to increase rates to weather the storm.