One-third of small businesses fail within their first two years of operation, according to the Small Business Administration.
By the five-year mark, the failure rate jumps to 50 percent. Those numbers are daunting, but learning what so many self-employed entrepreneurs do wrong can put you ahead of the curve and give your business venture its best chance of success.
Growing the Business Too Aggressively
Image via Flickr by kenteegardin
It’s only natural for rookie entrepreneurs to have grand plans for their business venture. But acting on these plans all at once and taking an aggressive approach to business growth is an all-too-common mistake.
“It happens a lot,” confirmed Erik Rannala, cofounder and managing partner of Los Angeles–based Mucker Capital, told Entrepreneur. “People raise money, think they’re flush with cash and then spend it on the wrong things. But by the time they realize that spending isn’t getting them anywhere, it’s often too late.”
What the wrong things are depends on your business, but a good rule of thumb is to avoid spending money on anything that isn’t essential to your company right now. While it’s good to think about what’s to come, it’s more important to lay a solid foundation for your business. Otherwise, it may not have a future at all.
Failing to Reserve Enough Money for Tax Payments
Balancing a budget is one of the greatest challenges for the self-employed. Managing day-to-day expenses is never a picnic, but tax time adds extra pressure. You know you’ll need money to cover the taxman’s bill, but if you’re like many inexperienced entrepreneurs, you’ll probably underestimate how much. Without adequate liquidity, you could find yourself in debt or face a hefty fine or, in severe cases, jail time.
The federal government imposes an additional 15 percent self-employment tax on top of the standard income tax to cover the FICA deductions automatically subtracted from most people’s paychecks. The experts at Business Know-How recommend setting aside 20 percent of your earnings to ensure that you can pay your tax bill.
Thinking You Can Do It All
As a self-employed person, you’re ultimately responsible for all aspects of your business. But don’t confuse that responsibility with doing it all. You might be incredibly well-informed about your industry, but that doesn’t mean you have the know-how to handle all aspects of your business operations. Be realistic about your own knowledge and expertise, and outsource the tasks you aren’t comfortable with.
For example, you might know basic bookkeeping but feel uncomfortable filing your taxes. You can hire an accountant once a year to ensure that this job is done right. You should also find a lawyer to contact now and again when legal issues arise. While hiring these professionals can take a bite from your budget, their fees will be much smaller than the penalties you could incur if you muddle through and make a mistake. Hiring people with other skills will also allow you to focus on the things you are good at and thus work more efficiently.
Merging Your Professional and Personal Lives
While financial health is important, mental health shouldn’t be underestimated. Common habits of self-employed people, like working from home and taking client calls on weekends, can cause a merging of professional and personal lives even when keeping these aspects separate is essential for creating the balance we all need for good mental health.
Learn how to set up your voicemail on your smartphone so it can collect your professional calls outside of business hours. If you work from home, make sure you restrict your business activities to a dedicated office. When you go back into the rest of your home, you should shift gears and return to your personal life. Avoid blowing off social engagements in order to work, because spending time with family members and friends will help you recharge your batteries and prevent you from burning out.
Research shows that for every small business success, there are many more that fail. But don’t let those statistics get you down. Instead, learn from the most common mistakes other rookie entrepreneurs make. By doing things differently, you can maximize your chances of making it in the competitive business world.