Avoiding Common Pitfalls for Startup Businesses
How to avoid the common pitfalls startup businesses experience.
Wherever you are on the road to success, you can dodge the unhappy consequences of some of the more common mistakes that cause the early demise of new ventures by continually watching out for some common pitfalls. The fundamentals, the blocking and tackling of business, must be observed in order to prevent certain disaster. They won't prevent all disasters, but an ounce of prevention of the basic pitfalls is surely worth well more than a pound of cures.
So now that you're up and running, if you're not ready to deal with the many all-too-possible misadventures that can befall the under-prepared entrepreneur, make sure that you've covered the fundamentals such as securing your success with security precautions and managing your risk by insuring your business against unexpected loss.
Take Security Precautions to Protect Your Business
Some of the most common pitfalls in business can be avoided if you pay attention to some simple security precautions. Get in the habit of opening all the mail yourself, practicing good computer access and file management, maintaining confidentiality and using locks and alarms.
Open your mail yourself. The check is in the mail, or is it? One ongoing commitment should be to personally open all mail. Don't ever delegate this chore. Most of the mail you'll receive will be routine in nature, and this task could easily be assigned to an employee. But that one piece in a thousand is the one you can't afford to miss seeing first. You will be amazed at the things you can learn from tending to this seemingly low-level task.
If your bookkeeper were to embezzle funds and use the cash float to cover up the ensuing overdrafts — and you always hand the unopened and unread bank statement to your bookkeeper — there's no way you could learn of this problem until it's too late. Returned check notices come in the mail, but if you don't open the mail, you'll never know what they are or why you're receiving them.
Sign all checks yourself and be sure to limit company credit card holders to yourself and key employees. If you see the monthly bank statements and credit card statements every month, and you will if you open all the mail personally, you'll be in much better control of your business.
Complaints come via the mail as well. Do you want them hidden from you? Valuable information and opportunities come in the mail, but if you're not exposed to these you'll never know what you missed.
It's not necessary for you to process the mail. That can be delegated once you've opened it. But you must permit yourself to learn first-hand what's coming into your business or, in some cases, what isn't coming in.
Don't confine your daily vigil to the "snail" mail delivered by your friendly post person or FedEx minion. Keep an eye on your e-mail too. Use those passwords to protect access and to read this kind of communication daily. Let your customers know how to reach you in this manner. You'll be glad you did.
Practice computer security. Use passwords, and change them often. Restrict access to your electronic files as much as you can. No one needs to know all about your business but you. Use passwords, and change them often. Restrict access to your electronic files as much as you can. No one needs to know all about your business but you. Back up your data every day, and store that backup information in a location away from the site of your computer. Given the ready availability of cheap storage devices, such as flash drives, you can keep all your important data on your keychain.
Also, avoid the use of cloud computing or other online options when dealing with your business's financial records. While convenient, online solutions aren't quite as secure as a personal computer sitting on your desk.
Maintain confidentiality. Be discreet about how much you reveal of your business or personal information to anyone, including your banks. Your accountant and attorney need and deserve your full disclosure in order for them to serve your needs properly. Their confidentiality obligations to clients are universally respected.
But others, such as banks, creditors, and suppliers, will always ask for far more than they actually need. Just because they ask for it doesn't require you to give it. Negotiate on a need-to-know basis.
Use locks, alarms and cameras. Locks and keys may be low tech, but they're a high priority for securing physical assets. And it's a good idea, by the way, to have your locks changed periodically. Official-looking signs in your windows or parking lot are also a low-tech, low-cost example of sensible security measures. A subtle notice saying "we prosecute shoplifters" or "cars will be towed at the vehicle owner's expense" or "premises protected by XYZ alarm systems" can be surprisingly effective. And you can even get a dummy TV camera with a little flashing red light. Mount this on your wall and see how high tech you look.
The sophistication of your security systems is limited only by your budget. The technology is there for silent burglar alarms, fire alarms, motion detectors, electronic tapes to mount on glass, trip wires, exploding dye packets, and all varieties of electric eyes. Consult with a security firm and get a menu of choices and prices in order to evaluate what would be most cost effective for your business.
Managing Risk and Insure Yourself
A clumsy client trips on the antique oriental rug in your office, falls, and considers retiring on the proceeds of this misadventure. Or, your product is swallowed by a customer's dog, with the predictable ill effects. Or, your inventory gets fried in a warehouse fire — along with your computer, which held all your accounts receivable records, among other irreplaceable files. To avoid losing a lot of sleep, evade these potential pitfalls and manage your risk.
Managing risk can be done in several ways. Once you've identified a risk, you can elect to:
- Prevent it — by, for example, practicing good fire safety.
- Avoid it — by, for example, subcontracting a part of your product manufacturing that involves hazardous materials.
- Spread it — by, for example, backing up your computer files and keeping the copy at a separate location.
- Absorb it — by, for example, assuming that certain losses are an acceptable cost of doing business.
- Transfer it — by, for example, sharing the risks with an insurance company.
In most cases, risks that you can't readily handle or predict are best transferred to a reliable insurance carrier. You are no doubt familiar with personal insurance, such as homeowner's, personal auto, life, disability, health, and home business owner's. But if your business is located away from home or if it's home-based but growing fast, you'd be well advised to see a business insurance professional and evaluate the cost and benefit of transferring your risk via a comprehensive insurance package designed to protect your particular circumstances.
This sounds more complicated than it actually is. Insurance companies have been at it for centuries and they've thought of risks you never dreamed you had. So, they're well prepared to protect you from most perils via a standard policy at a reasonable price. You will be able to keep that price down by electing to take the highest possible deductible you can afford. An annual review of your business insurance with your agent will assure that you still need what you're paying for and that no new risks have emerged, due to the growth or nature of your business, that are not covered in your package policy.
Business insurance fits into a concise menu from which to choose. There are three basic types of policy coverages:
|Liability ||Special ||Property |
|General Liability ||Business Interruption ||Auto Physical Damage |
|Product Liability ||Plate Glass ||Comprehensive Damage |
|Auto Liability ||Credit Life ||Crime Coverage |
|Workers Compensation ||Surety Bonds ||Fire & Extended Coverage: |
|Umbrellas || |
|For hail, vandalism and malicious mischief |
|Inland Marine |
Liability insurance for your startup. Liability implies negligence. If you permit a hazard to exist, you are negligent. An example is neglecting to remove the ice and snow from the sidewalk in front of your store. But these days, no matter how diligently you remove all possible hazards from your business, you could be sued successfully for accidents resulting from the carelessness of a customer too. Businesses are assumed to be responsible for just about anything, and so liability insurance is your last line of defense against devastating claims for things over which you may have little or no control.
General liability insurance will protect you from payments required to be made for bodily injury or property damage to a third party, for medical expenses accruing to the underlying incident, for the cost of defending lawsuits, including investigations and settlements, and for any bonds or judgments required during an appeal procedure.
This type of coverage comes with exclusions and limitations. The exclusions typically include war and sometimes property of others entrusted to you (such as clothing, if you own a dry cleaning business.) Liability for the property of others can be removed as an exclusion, usually for an additional premium or via separate coverage. Limitations will be akin to those on your personal auto policy; for example $100,000 per person and $300,000 per accident. In addition to general liability coverage, depending on what kind of business you're in, you may need one or more of the other kinds of liability coverages such as:
Product liability insurance, which can cover products you may manufacture or sell, or your services if you are, say, a mechanic or house painter. Under the name of malpractice insurance, this is the classification of coverage that will cover physicians, dentists, accountants, and lawyers. In today's world, a minimum of $1 million is recommended coverage for businesses dealing with the general public. It's also a good idea to have the name of your business added to your suppliers' insurance riders as an "additional named" insured. This adds another explicit layer of protection should a product liability suit arise. This generally costs nothing, and has become common practice for companies in food retailing, wholesaling, marketing, and manufacturing.
Auto liability insurance, which for a business, just as for your personal vehicles, should be comprehensive. This is especially important if you have employees who drive for your business.
Workers' compensation insurance (formerly called workman's compensation) which is required by law in all states, protects an employer from liability for an accident involving an employee. This type of insurance will pay for medical expenses and lost wages for an injured employee and, in cases of death or disability, provide lump sums or annuities. Maintaining a safe working environment will go a long way toward controlling the cost of this type of coverage, but a careless or accident-prone employee can raise your insurance rates out of the realm of affordability very quickly. Proper selection and training are required to minimize this risk. In some states, this coverage is not required for family members who may be working in the business. Your agent will know if any exceptions apply to your situation.
Umbrella liability insurance is an all-inclusive option that can cover enormous liabilities exceeding the normal limits of your basic policy at a fairly low cost. This coverage is almost always worth considering, since it provides a valuable safety net for you and your business.
Special insurance coverages for startups. Special types of insurance are available to cover special needs. Among the most common of these special-purpose coverages are:
Business interruption insurance, which will reimburse you for losses resulting from having to shut down your business due to events such as fires, earthquakes, floods, or other disasters. You'll have no cash coming in during a shut down, but will likely have to cover payroll, taxes, and other ongoing expenses during that period. Business interruption insurance can fill this important need for you.
Plate glass insurance will cover specifically-named panes of large windows and signage, including emergency board-up services.
Credit life is the name given to a class of insurance used by retailers selling larger ticket items to consumers on credit. It insures that you'll be paid should your customer die before a debt is paid off. This type of insurance is fondly referred to in the trade as "croak and choke" coverage. There is also a variety of commercial and installment credit coverages available when your business gets big enough to warrant this level of protection.
Surety bonds exist in several forms. Performance bonds guarantee that you'll make good on your promises. Contractors use these extensively. Fidelity bonds vouch for your credit worthiness. You will need to provide a lot of documentation to the carrier to prove your ability to meet the contracts you're bonding, and some carriers may require collateral. However, once your track record is established with an insurer, they will usually issue these bonds readily.
There are many other types of special insurance, from boiler and machinery coverage to rents, sprinkler, and transportation (by common carrier) hazard protection. Ask your insurance professional if any types are offered that will cover your special situations as they arise.
Types of property insurance for startups. Property insurance can make you whole in the event you sustain a loss to any business property, be it a truck, store fixtures, inventory, raw materials, and so on. If possible, you'll want to get "all risk" forms of insurance in order to secure the broadest coverage available. Otherwise, you'll have to insure each class of property with a separate policy. "All risk" policies generally cover all perils not explicitly excluded.
Auto physical damage policies, for personal or business vehicles, can cover collision damage as well as assorted perils from fire, wind, hail, vandalism, and malicious mischief, as long as you take out a "comprehensive" or extended coverage policy. Collision insurance can be carried with a high deductible, thus reducing premium costs significantly.
Cargo coverage can also be secured to cover the cost of any losses to inventory or goods on board your company truck.
Crime insurance is designed to cover specific risks you may have in your business. These can range from burglary coverage for your safes to off-premises robbery of your bookkeeper en route to make a bank deposit. Coverage can be obtained to protect you against embezzlement, employee theft, and inventory losses resulting from criminal activity as well as a romantically titled risk known as "mysterious disappearance." Crime insurance is generally quite expensive.
Fire and extended coverage insurance policies are standardized in the U.S. They cover fire and lightning, but exclude theft. Extended coverage is almost always purchased with a standard fire policy. Comprehensive "all risk" extended coverage is what you'll want for your business. These policies cover hail, windstorm, and vandalism as well as fire. Policies can be purchased that will also protect your accounts receivable records, computer files, currency, securities, and valuable papers. Flood losses, however, must be insured separately. Flood coverage varies depending on your geographic location and hence cannot be standardized nationally.
Inland marine insurance is a rather misleading name for a type of coverage used to protect high risk, mobile items of stated value that are not covered by your plain-vanilla commercial property policies. Inland marine coverage can protect valuable tools, for example, if you're a mechanic or tradesman, artwork if you operate a gallery, or a jeweler's inventory.
The important thing to remember about inland marine coverage is that it covers property in transit or mobile property, whereas standard property insurance normally covers items located within 100 feet of a specific physical address.
Your insurance professional can also meet individual needs with rent insurance, fire sprinkler coverage, boiler, machinery, and key-person policies. Always deal with a stable carrier and, should you sustain a loss, document it thoroughly and report it promptly.
Once you have covered these basics, you'll be able to avoid the most common pitfalls. You're still not immune to setbacks, but you'll be well on your way to having a successful business.
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