New year, new business: Mistakes to avoid when starting a business

2024 is the year you’re finally going to fulfill your dream of launching your own business or proactively growing the one you already have. The new year is an exciting time, full of promise and possibilities. Unfortunately, starting a business can be challenging. Your small business isn’t likely to be profitable in the first year, and not all businesses make it through the startup phase. According to the U.S. Chamber of Commerce, 18 percent of small businesses fail within the first year, and 50 percent fail within five years of opening their doors. Despite the risks, there are many benefits to having your own business. You get to make your schedule and maintain independence, not to mention the unlimited financial rewards and the opportunity to be innovative in your field. With the right strategy, you can overcome the challenges that keep many startup business owners from growing or succeeding, including funding and organization issues.

4 mistakes to avoid when starting a business

As the old axiom goes, knowledge is power. By understanding the most common errors made by other entrepreneurs, you can take action to avoid them. Here are the top four mistakes that new small business owners make when starting their small businesses.

1. Neglecting to make a business or marketing plan

You may have a groundbreaking service or product, but it won’t matter unless others know about it. And word of mouth won’t cut it for most businesses. One of the first things you need to do when starting a business is develop a business plan with marketing in mind. A business plan that incorporates marketing will help you and your team because it provides clear direction. “You go in knowing your target market, the products and services you want to offer them and the competitive advantage that will help close the sale,” says Dequiana Jackson, a small business marketing strategist and CEO of Inspired Marketing. “It saves money because you can focus your advertising efforts only in arenas where you know your ideal clients will be receptive. Your marketing plan should also help define your brand, the way you show up in the market to your customers.” For example, according to Bankrate’s  2023 Small Business Saturday Survey, 44 percent of small business holiday shoppers would shop online, while 51 percent would shop small businesses in person during the holiday season. Since customers are looking online to shop with their favorite small businesses during the holiday season, creating a strategy that incorporates online shopping would be a plus in customers’ eyes. Researching where your clients or customers hang out online is key, says Jackson. “If your company is B2B, it’s possible your clients are on LinkedIn looking for tips on growing their small businesses. If you have a products-based company, your customers may be on TikTok and YouTube looking for product tutorials.”

Research the market to stand out from competitors

Be sure to conduct market research, too, to identify what gaps exist in your industry. Uber, for example, entered the market when there were already multiple transportation options. But it addressed the fact that there was no easy way to order on-demand transportation services. Uber filled that gap. “Even in less innovative businesses, you can create a competitive advantage,” says Jackson. “Perhaps the norm for getting a product in the hands of customers is six weeks, and your business has systems in place to cut that time down to three weeks. That’s an advantage customers will appreciate.” “Enhanced customer service is also an easy win for small businesses that can offer a more personalized shopping experience, like special packaging and handwritten thank you notes.”

2. Trying to do everything yourself

There’s a time to DIY and a time to delegate. Be sure to respect the difference. Hiring people to assume duties you can’t reasonably handle will be money well spent, says Neale Godfrey, small-business consultant and author of “Money Doesn’t Grow on Trees.” “You have to accept that you are not an expert in everything,” says Godfrey. “A lot of businesses fail because the entrepreneur is not willing to give up the reins to other people who may do it better. Yes, it’s your idea, your baby, and you’re protective about it. However, bringing experts on board will free you up so you can do what you do best.” By delegating responsibilities to trusted staff or consultants, you will have more time and opportunity to focus on your product or service. Having a team that will work on your mission will not just provide you with valuable insight and assistance, but you can enjoy taking a step back and developing ideas. For example, to keep your business in order, consider investing in accounting software such as QuickBooks or FreshBooks. However, do not hesitate to hire an accountant if you’re out of your depth. Zainep Mahmoud, senior business director at Capital One, says, “If you struggle at all or simply don’t have the time to dedicate to managing your finances and sticking to a budget, that’s a sign to bring on an expert.” This doesn’t mean you completely surrender control when you outsource work. If you hire a designer to help with the look of your café or a developer for your website, you can get involved in the direction those contractors take while working for your business. If they take too much liberty, the project can spin into something you don’t want. You always have the final say. Remember, your name and finances are on the line, not theirs.

3. Ignoring the paperwork

As wonderful as it would be to hang your welcome sign and announce you’re open for business, you do have to follow the proper protocol. Plenty of startup business owners get into hot water because they didn’t submit the proper documentation. Essential paperwork includes: Permits and licenses. There are specific licenses or permits your business may need to start your business on the federal, state, county and city levels. You can start by finding which licenses are required on the federal level. Contact the Small Business Administration or a Small Business Development Center near you if you have any questions. Business structure. If your staff is a party of one, you may be a sole proprietor and stay that way. Or you may launch as a more formal company, such as a Limited Liability Company (LLC) or a Corporation. Which business structure you choose can depend on the number of shareholders you have and which structure gives you the best tax benefits. Many small businesses choose to become LLCs or S Corporations for tax purposes.

The most simplistic business structure, in the beginning, will usually be best. For many, that means starting as an LLC to protect your personal assets. — Neale Godfrey Small business consultant and author of 'Money Doesn't Grow on Trees'

State and federal tax IDs. An Employer Identification Number (EIN) is similar to a Social Security number, but it is specifically for your company to pay state and federal taxes. If you’re a sole proprietor, you will not need an EIN and can use your Social Security number instead. Business name. Once you know what you want your company to be called (and have made sure it’s not already taken), you’ll need to register your business with the state where you’re conducting business and possibly with the federal government. Business bank account. You want to avoid mixing your personal and business finances, so open a designated business bank account. Having a separate account will help you manage your taxes. To open an account, you’ll need your identification and that of any co-owners with more than a 25 percent stake, the company’s EIN (if you have one) and the name and address of your business. You’ll also need to list the legal structure of your business. Health insurance requirements. Generally, small businesses with fewer than 50 employees aren’t required to offer health insurance, but if you plan to grow quickly, be prepared.

4. Not having a budget

Zainep Mahmoud, senior business director at Capital One, stresses the importance of creating a business budget for current and projected expenses. “Budgeting early and often is a critical practice to manage cash flow,” says Mahmoud. “Positive cash flow is what keeps a business afloat and drives growth.” Creating a budget in advance will help you identify how much money you will need to meet such financial commitments as payroll, rent and inventory. With the unpredictability of today’s economic landscape, you will want to plan for both seasons of profitability and downturns in the market. When the business is making more than expected or is needed, consider building emergency savings, called a contingency fund, to help you through less profitable seasons.

You can use financing to help you manage cash flow

To manage short-term costs, get a small business credit card. Not only are they safe and convenient payment tools, but they are also specifically designed with the small-business owner in mind. They tend to have large credit limits, and you can buy what you need without using up all your capital. Plus, you can pay over time if necessary. The perks, rewards and benefits are different from what a personal card offers, too. “Using a business credit card as the primary purchasing solution for business expenses like inventory, equipment, software, advertising and shipping could mean thousands of dollars back to your business in the form of rewards,” says Mahmoud.

Bankrate insight

You can also manage cash flow or finance a purchase through a small business loan. There are various types of financing you can get to fit your funding purpose. For example, you can use a business line of credit to get regular access to credit that you can typically reuse as you pay down the loan.

The bottom line

Starting a business can be an exciting yet stressful experience. You’re going to make your own mistakes, but it’s also great to learn from the mistakes of others before you make them. To succeed, you want to develop a strategy for marketing your business, managing your finances and conducting day-to-day operations. That way, you can make business decisions for the short and long term that lead to stability and growth.