Nearly 50 percent of all new businesses are gone after five years according to the Small Business Administration. A lack of capital, poor planning, changing market conditions and expensive overhead can contribute to business failure.
Beyond the business plan, there are some things that every owner should know. You cannot anticipate every problem, but you can be aware of the challenges you’ll likely face and learn how to meet each one.
1. Regulations. Every business must comply with local, state and federal regulations, burdens that can cost your business money.
Employees with fewer than 20 employees spend 36 percent more per employee to comply with federal regulations than larger businesses do according to the SBA. Tax compliance, environmental, economic and OSHA requirements must be met, representing some of the costs of doing business. Regulations vary across the country; where you set up your business can have a profound impact on its bottom line.
2. Health care. The recent U.S. Supreme Court ruling upholding the Affordable Care Act, also known as Obamacare, does not provide all the answers that small business operators are seeking.
Under the ACA, small businesses with fewer than 50 employees are not required to offer health insurance. However, such firms can receive tax credits, particularly those companies employing mostly low- and moderate-income workers according to the IRS. Eligible businesses must pay at least half the cost of single coverage for their employees to qualify. Further modifications of the ACA are expected in the coming years.
3. Taxation. What your business makes will determine how much you are taxed individually or corporately. Work with an accountant to establish the best business structure for your needs.
The SBA reports that self-employed individuals, representing the smallest of all small businesses, are typically taxed at the federal rate of 10 percent. Nearly 1 in 25 of the self-employed are taxed at the highest rates of at least 33 percent. You may be able to structure your business in such a way to avoid higher taxation.
4. Credit. Small business owners rely prominently on their own funds to start their businesses. To stay in business, such enterprises require credit, with about 75 percent of firms relying on bank loans, lines of credit and credit cards according to the SBA.
To obtain credit, your credit history must be strong and your personal credit high. Unsecured credit carries a higher interest rate while secured credit means that your business is putting up collateral. Such collateral may include equipment, cars, real estate or other property. Small business operators can seek credit personally or through their business by using an Employer Identification Number.
5. Growth. An essential part of any business plan is anticipating growth and how to sustain it. Growth, however, requires change and not every contingency can be anticipated.
Related to growth there are certain problems that must be addressed to sustain expansion. These include: management, especially if your team is risk or conflict adverse — maintaining the status quo can mean your business will not adjust to meet these changes. Also, management must ensure that enough repeat and referral business comes in, with a marketing plan that yields quantifiable results.
Businesses that fail may miss out on meeting their objectives, not anticipate changes to the market and have high overhead that cannot be sustained. Management in-fighting, a lack of a succession plan and economies of scale are some other reasons why a small business will shut down.
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