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3 Things Entrepreneurs Need to Be Wary of Before Starting a Business

Editor's Note: Take a look at our featured best practice, Five Stages of Business Growth (25-slide PowerPoint presentation). This presentation introduces a framework for entrepreneurs to use when building and navigating their business from a nascent, startup state to an enterprise with a global footprint. This framework, called the 5 Stages of Business Growth, is based on the fact that all businesses experience common [read more]

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Despite the high global inflation rates, business owners are still rather bullish when it comes to starting new ventures. In fact, a consumer benchmark report by Yelp notes that more than 150,000 new businesses have opened during the first quarter of 2022, with the growth being driven by enterprises in the beauty, travel, and nightlife sector. New businesses are a positive indicator of economic growth as it creates new jobs and diversifies the country’s economy, allowing it to better withstand crises in the future.

That said, not every new venture gets to become a success story. Numbers from the Bureau of Labor Statistics show that about 20 percent of new businesses fail within their first two years in the market and a whopping 45 percent don’t even make it to the five-year-mark. This is due to a variety of reasons, such as lack of financing, not investigating the market, rapid expansion, bad location, inflexibility, and bad business planning. For business owners to find success in their respective industries, they should be cautious about three things before starting their venture.

Startup Costs

One of the key business aspects that owners should be careful with when starting their venture is their startup costs. Correctly budgeting their organizational expenses can help business owners successfully launch their business, entice potential investors, and calculate future earnings.

The U.S. Chamber of Commerce notes that a simple way to calculate startup costs is by listing the needed expenses and assets, and estimating how much they cost. From there, business owners can perform essential financial calculations, such as a break even analysis and a formal report for lenders. To future-proof their computations, businesses owners should remember to factor in inflation, as well as ongoing costs.

Credit History

Business owners will need to make themselves attractive to lending agencies, especially if they don’t have enough capital or plan on expanding their venture down the line. For that reason, business owners should keep a close eye on their credit scores. If they don’t have a positive credit score and history, lenders and financial institutions might present them with bad loan terms, or worse, not even approve them for a loan.

That said, business owners should make it a habit to check their credit history and score. A feature on hard vs. soft credit checks on Upgraded Points outlines how entrepreneurs should perform a soft credit inquiry to monitor their credit history through services like Credit Karma or Mint. They should also avoid applying for loans and credit often, as lenders will need to perform hard credit inquiries whenever an application is submitted, which will then affect the applicant’s credit score. By knowing where their credit score stands, business owners can make the necessary changes and adjustments to raise their credit scores.

Operating Costs

Part of any good business plan is calculating the operational costs for at least six months. While different businesses have different costs connected to them, business owners should consider general expenses such as rent, utilities, equipment, fixtures, tax deposits, marketing budgets, payroll, insurance, and professional services. An article about operating expenses on Entrepreneur highlights that business owners should be conservative when it comes to computing the operational costs. Doing so can help create a financial cushion that will help business owners avoid financial panic and anxiety when faced with an unexpected event down the road.

New business owners can increase the probability of success as long as they create a foolproof business plan that considers their startup costs, credit history, and operating costs. Having the three aforementioned aspects pinned down can help business owners make accurate financial statements, apply for better loan terms, and keep their business afloat.

A good idea is to hire a virtual assistant to help you compile the necessary information and paperwork.

Excel workbook
New Version - Massive Update !! This updated version of the previous template is almost a completely new model including new assumptions, new Setup Reports and new and updated Output Reports. Creating a financial plan is the roadmap that lays out the path for your company's future financial [read more]

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About Shane Avron

Shane Avron is a freelance writer, specializing in business, general management, enterprise software, and digital technologies. In addition to Flevy, Shane's articles have appeared in Huffington Post, Forbes Magazine, among other business journals.


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