Starting a business is pretty tricky for the uninitiated, and what you don’t know can be disastrous. Most small business fail within the first five years, but that’s often because of easily avoidable mistakes. If you’re planning to start a new business, especially one that’s service-based, here are some pointers to help you avoid some of the most common startup pitfalls:
- Use a contract. Anyone who tells you that you don’t need a contract is wrong. Before you put in a minute of work, hammer out the terms of the agreement and get it on paper. Contracts ensure that the work can’t be subject to scope creep — where client expectations far overreach the budget — and that you have legal documentation if any issues arise when it is time for you to get paid.
- Create agile business systems. Using business systems to define and control your workflow is vital to running a smooth and profitable business. A system breaks down tasks into a step-by-step process with checkpoints to ensure quality and consistency from every employee, including yourself. Failing to optimize your business with a system equals wasted time and effort. Reevaluate the system frequently to find weaknesses and increase efficiency.
- Understand your payment terms. Owning your own company has its drawbacks and at first, payment schedules are one of them. Be prepared to wait for payment, even if you’re an independent contractor in business by yourself. Know your contract — and know what the terms mean and how soon you can collect. The bottom line is that you can’t pay this month’s light bill with money you won’t see until 30 or 60 days after the job is completed.
- Cover your legal bases. I found out the hard way that there are such things as too little — and too much. I started consulting without a contract and the company went belly up, leaving me high and dry. So on the next job, I hired an attorney, and his fees came to more than the job was worth. While you should always use a contract, don’t spend more than you can afford to get one made. Our Deal offers easily customizable contracts; they have most common contracts with an easy-to-use point-and-click interface, allowing you create legally binding agreements at a low cost.
- Know the difference between employee and independent contractor. For a brick and mortar business, employee needs are mostly clear-cut, but when you’re working in a virtual world, hiring can be a little bit trickier. Independent contractors can be a cost-effective solution, but understand that they may be working for many different clients at the same time and may not be available to meet your deadlines. On the other hand, you don’t pay them if there is no work to perform. Either way, you need to define the working relationship and the payment agreements in advance.
- Have legal agreements handy. Make sure you understand different types of non-disclosure agreements and intellectual property agreements so that you and your business are protected. Non-disclosure agreements are important for employees who will be privy to the inner workings of your business and who may have the opportunity to interact directly with clients. Look at a one-way NDA if you are just starting out.
- Don’t do joint ventures without an agreement. When you team up with another business for a joint venture, get your ducks in a row first. Define roles, outlay and expectations to avoid issues down the line. In addition to making the venture run smoothly, it will preserve the business relationship even if the project bombs.
- Define your banking boundaries. Use a separate bank account and accounting software. As tempting as it is to simplify the books by using your personal account or an existing account set up for another business, it’s a much better practice to keep everything separated. You, or your accountant, will thank you later.
- Prepare for new tax types. Taxes can be a real nightmare for a small business that can’t afford an accountant. However, there are may tools on the market to help you prepare and track your expenses. For example, if you are self-employed as an independent contractor, you’ll have different forms to file (and taxes to pay) than an employee.
- Find the right tools. Utilize the many free and low-cost tools and services available to business owners today to help ease the pain of paperwork, such as:
- Freshbooks – an affordable online billing service
- Tax Receipts – a resource to maximize your tax deductions with an organized system, and learn what deductions you can take in plain English
- Outright – a simplified, secure online bookkeeping service
- Our Deal - contracts that are easy to understand and can be signed online
- Evernote – an online “everywhere” app to capture and access ideas by voice recording, text, documents, handwriting (iPad), web clipping, etc.
Building a successful business starts with a dream, but without the requisite knowledge and tools, it can turn into a nightmare. There is no substitute for taking responsibility for your own success. Take the plunge, but check the depth of the water beforehand — and avoid the pitfalls of starting a business by knowing what they are first.
Nick Reese is a founding partner of Microbrand Media, which specializes in digital strategy and affiliate marketing. Nick also manages and advises several other companies and enjoys connecting with other entreprenuers.
The Young Entrepreneur Council (YEC) is an invite-only nonprofit organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, the YEC recently launched #StartupLab, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses via live video chats, an expert content library and email lessons.