America’s small businesses – some 20 million strong – are the strength of our nation’s economy. They account for 39 percent of the country’s gross national product, create two out of every three new jobs and produce two and one half times as many innovations per employee as do large firms. They are the heart and sole of America’s economy, and yet only two-thirds of new employer establishments survive at least two years, and 44 percent survive at least four years. While these numbers aren’t devastating, they could be better. Let’s go over what the most common small business mistakes are, and how you can avoid them.

The first mistake to avoid is structuring your small business like a corporation. Certainly, the corporate structure has its advantages, but it’s not for everyone. Evaluate your needs in light of the advantages and disadvantages in relation to the company’s distributions, paperwork, and the ability to claim losses. Don’t assume a certain business structure is right for your company before making appropriate evaluations and assessments.

Too many new business owners believe they can handle all their business needs on their own. Failure to get professional help is a common mistake that leads to tremendous financial pressure. It is typical in the start-up process to handle such tasks as advertising, marketing and customer service on your own. However, in areas such as bookkeeping, accounting and tax preparation it is important to seek out expert help. Delegate these tasks earlier than later, as to avoid serious financial burdens and keep the business moving in the right direction.

Monetary mismanagement plays a huge role in the success of new businesses. From poor credit and debt management to starting a business with limited cash to failing to stay liquid, it is important to manage your business’s financed from the get-go. Remember – it takes money to make money, so make sure your business has a respectable line of credit to start. Establish a solid credit management plan to ensure your business stays afloat during hard times, and has the ability to expand its operations when necessary. Staying liquid keeps the business’s budget available to pay all its bills, overheads, salaries, inventory and taxes.

In order to manage your company’s finances successfully, it is crucial to be systematic and religious about collecting receivables (money that’s owed to you). Enlist a third party to ensure that your company is being paid on a timely and structured manner, and manage those numbers! A big mistake for small business owners is disregarding important financial statistics such as bank account balances, gross sales, profit margins, receivables, payables, cost of goods, cost of labor and interest. Failure to monitor these numbers enables you and your business the ability to be alerted to potential problems before they threaten the life of your business.

One of the most common mistakes small businesses make concerns the overall mismanagement of company taxes. Be prepared at all times to have your business undergo a tax audit by keeping the proper records and familiarizing yourself with the Freedom of Information Act. The Freedom of Information Act requires the IRS to release business audit manuals for public review, as well as gives you access to the computer file the IRS has on you and your business. Learn in advance and be prepared. Make sure you classify your workers correctly in order to avoid harsh back taxes and penalties issued by the IRS in the situation of reclassification. Additionally, do not operate on “net payroll.” The IRS is very aggressive in collecting employment taxes in full and on time. Finally, failure to file employment tax returns on time, regardless of whether the business or individual is behind on their taxes, can cause insult to injury. The failure to file injury is up to 25 percent of the tax liability.

Small businesses play a crucial role to the American economy. Consider these facts – small firms:

* Represent 99.7 percent of all employer firms.
* Employ half of all private sector employees.
* Pay 45 percent of total U.S. private payroll.
* Have generated 60 to 80 percent of net new jobs annually over the last decade.
* Create more than 50 percent of nonfarm private gross domestic product (GDP).
* Supplied more than 23 percent of the total value of federal prime contracts in FY 2004.
* Produce 13 to 14 times more patents per employee than large patenting firms. These patents are twice as likely as large firm patents to be among the one percent most cited.
* Are employers of 41 percent of high tech workers (such as scientists, engineers, and computer workers).
* Are 53 percent home-based and 3 percent franchises.
* Made up 97 percent of all identified exporters and produced 26 percent of the known export value in FY 2002.

If you have any questions or comments on small businesses and how to keep them financially successful, contact My Money Track today!