The six biggest mistakes made by new businesses

The six biggest mistakes made by new businesses

It’s a confronting fact that most new small businesses fail within the first five years. This, in large part, is due to a lack of proper planning, poor business structure and the absence of professional business advice.

While it’s natural for new businesses to focus on creating a quality range of products or services in order to attract and retain a customer base, not giving enough attention to business planning and operational systems is the fastest route to failure.

Indeed, failing to plan is like planning to fail, and ignoring expert business advice will expose you to a range of risks from tax liabilities to cash flow droughts – and ultimately the failure of your business.

But don’t despair. Here are the most common new-business mistakes you should avoid when setting up shop…

1. Too fast, too furious

If you’re buying an established business, don’t rush into making immediate changes. Sticking up a ‘under new management’ sign and making poorly thought-out changes just for change sake will quickly erode your existing customer relationships. Instead, take time to understand the business and introduce strategic change gradually.

2. Poor cash flow forecasts

Many new businesses rely on the assumption that they’ll establish instant cash flow in order to pay their mounting setup costs. In reality, however, achieving sales and the resulting revenue takes time to develop and converting that to significant cash flow may take even longer. Pre-planning to cover overheads and capital expenditure such as loan repayments during this building phase is critical.

3. The DIY approach

While you may be an expert in your chosen field, it’s unlikely that you also have professional-level business compliance knowledge. Failing to seek professional advice to guide you through the compliance minefields of GST, PAYG, WorkCover, Fair Work awards and employment contracts, trademarks and business names, licences and permits, and business insurance will expose you to a range of risks and financial penalties that may threaten your business before it really gets started.

4. Back-end blind spots

It’s certainly true that much of your business success rests on your ability to deliver market-leading products and services. However, staying blind to back-end systems and processes while you obsess over product development can sink your ship as easily as a poor product. Establishing tight systems around bookkeeping, accounts receivable, accounts payable and reporting from the start will pay huge dividends down the track.

5. Poor business structure

Selecting the right business structure is vital to your long-term success and should be aligned to your overall business goals. Setting up as a sole trader, for example, may be the cheapest and most simple option, but offers the least by way of asset protection and flexibility for tax planning. Shifting your business structure later is not as simple as you might believe and can come with a range of hefty income tax, capital gains tax and stamp duty burdens you’ll need to shoulder.

6. Too many chefs

Too many chefs certainly do spoil the broth, and we’re not just talking about the kitchen. Keeping all your business advice under one umbrella is not only more cost effective than paying a range of service providers, but also ensures all your advice is informed by a throughout knowledge of your business. It also lowers your stress levels as you deal with one point of contact to handle all your compliance, tax planning and profit improvement needs while ensuring everything you do is aligned to your overall business goals.   

David McKellar is a Melbourne-based chartered accountant and director of Allied Business Accountants. He assists new and existing businesses achieve long-term, sustainable success through proper business planning and compliance.


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Joe Perri
Joe Perri
5 years ago

If I can add a comment to your article there is actually a 7th mistake that business owners make when starting their new enterprise and that is they completely overlook the finish line and final most important objective – sale, exit, succession.

When I started my company 20 years ago it was with the starting line as my objective i.e. how quickly can I get up to speed with new clients, sales, getting processes right, managing costs etc. etc.

I started another business last year but this time with the finish line of succession and exit and sale as my key goal having learned from the first business.

A an appropriate example would be two footy coaches – one wants to get his / her team on the park for the game and to be competitive – the better coach is the one that gets his / her team on the park geared to win the game.