Small businesses can mitigate or even eliminate many problems by heeding these warnings
There are many small business pratices or to do’s when operating or starting a small business. Take note of these pitfalls to help save time, money and better ensure business growth and success.
1. Do not co-mingle your personal and business funds.
Open a bank account for your business keeping all transactions separate from your personal accounts. You will need to apply for an EIN number to open a corporate account. And, apply for another credit card that you use solely for business charges. Your bookkeeping system will be simplified for tax purposes and your banker will consider you a commercial account.
2. Do not ignore the importance of having a good personal credit score. Use 680 as a benchmark.
A bankruptcy, a foreclosure, a short sale, and a loan modification will be on your credit report for not less than 5 years. If you have a business associate who has serious credit issues and you intend to borrow funds, ask him or her to avoid an ownership position until the credit issues are resolved and not on his credit report. However, be aware that lenders will average credit scores of owners of 20% or more of a business, so one weak score may not have a major effect. The ratings used by lenders may differ from the credit scores obtained by credit bureaus. Lenders use FICO (Fair Isaac Corporation) formula to determine credit scores.
3. Do not commence business operations until all the needed funds are available.
Don’t think about signing a lease, or any contract until you are assured of the availability of all funds needed from pre -opening to break even. You are not ready to open a business until you know all the costs and know how much working capital you will need until you can cover your expenses. You can ask a perspective landlord for a letter of intent which you can present to a lender, but do not sign a lease or other contractual agreements until your financing is in place.
4. Do not use short term debt for the purchase of equipment that has a long life cycle.
Do not use working capital for an item that has an long life cycle such as a car or truck or equipment that will be used for many years. That includes the acquisition of real estate. Never use credit cards to finance items with a long life cycle. Be careful about using credit cards to pay operating expenses, even if you intend to use the funds for a short period of time, you cannot control all payment issues. Credit cards can readily be obtained, but payments can be expensive and can impede the growth of a company.
5. Do not sign a partnership or a joint venture agreement that does not have a buy-out provision.
No one can project the future. Therefore, you need to have a method of unwinding a contract by having a provision to buy out an interest in a partnership or purchase stock from individuals when the contract does not meet the needs of all parties. You can seek counsel or find an on line document that addresses the concerns of the parties. Keep it simple, but make certain it is relevant.
6. Do not execute a lease without having an unbiased professional review the terms of the agreement.
Beware, the present market conditions favors the property owner. Many times the terms and conditions in a lease are not carefully reviewed and the tenant thus assumes unforeseen obligations such as structural repairs, replacement of air conditioning units, as well as increases in rental rates. If a property has been upgraded and the reassessment has not occurred prior to lease execution, the tenant may be assuming the increase in assessed value as well as a possible increase in the tax rate during the term of the lease. Be advised, the document was prepared by the landlord and therefore must be critiqued carefully by the tenant and his counsel. A real estate broker who is earning a fee from the transaction should not be considered an unbiased party.
7. Do not underestimate your operating expenses, or overestimate your income.
Being too overly optimistic does not serve you well because it is difficult to go back to a lending source or an investor when you run short of funds. Think conservatively and you will never be sorry.
8. Do not hire anyone until you check his/ her background and references.
When hiring one reference in not adequate. And, it is not foolish to run a report on a prospective employee. Training is costly so you want to be certain that you put the time into an individual who becomes an integral part of your team and will not use the position as a stepping stone for his or her personal benefit. Character is as important as qualifications.
9. Do not ignore the importance of including a dollar value for the services you provide to the venture.
There may be times when there is not enough cash in the account to draw a check for yourself or other members of management, but the cost of the services cannot be ignored in budgeting for operating costs. Without management there is no business.
10. Do not overlook the variables that relate to seasonality of your business.
Almost every business has seasons or months that are better than others. Never calculate your increases in revenues without taking the seasonality of your business into account. Adjust the expenses accordingly – there are seasons in which payroll will be higher or lower.
Stay tuned for my next piece where I’ll share more small business Don’ts.