Awhile back, my good friend and Central Florida Mediation Group partner Neal O’Toole forwarded me an e-mail summarizing a recent Inc. magazine article. I liked them all, but had a few legal additions (#8, 9, and 10) of my own.
Here are Inc. Magazine’s 7 Biggest Financial Mistakes Businesses Make:
1. Hiring in advance of revenue.
2. Borrowing money when you don't really need it, but when the bank is willing to lend it.
3. Not paying payroll taxes on time.
4. Pricing too low. Unless you are Wal-Mart or are trying to be (and have a real hope of achieving this), it is almost always better to sell fewer units at higher prices than to sell more units at lower prices. High prices protect your margins and also enhance your brand.
5. Permitting accounts receivable. Unless there is a good reason, you should not offer credit terms to customer.
6. Counting on one major source of revenue. It is best to assume that, unless you are proactively building revenue, it is contracting. You should look at your revenue as if it were a portfolio; you do not want all or a majority of revenue coming from one or a few sources
7. Hiring too much overhead. People at companies bring in sales, build products, or serve customers. You can justify employees filling these roles. The real challenge is when you hire "overhead" people, who cost the company money but don't sell or produce anything directly. It is best to keep this cost as low as possible.
And here are my additions:
8. Not having an operating agreement (for a Florida LLC) or shareholder agreement (for a Florida corporation) based on Florida law. This agreement should address what will occur if a principal dies, goes through a divorce, or becomes disabled. It must also address the dissolution of the business. These issues can result in a lot of expenses, stress and attorney fees if they are not addressed up front in an agreement.
9. Not having a wealth protection plan created in consultation with an attorney. The exposure to liability in this society is huge. A discussion with an attorney who understands wealth protection (particularly Florida's fraudulent conveyance statutes) can protect your business and family from substantial impacts.
10. Not having a good estate plan for the principals of the business. These plans must address the fate of the business in the event of a death. There are numerous stories where one principal dies or gets divorced and the other principals are left with a surviving spouse who knows nothing about the business, or a former spouse with a malevolent attitude toward the other principals, who now have an unwanted and uninvited new partner. Making sure your will or trust addresses your wishes as to your interest in the business can save headaches and litigation costs for your family and your business partners.
To read the Inc. Magazine article in full, click here.
Most of all are you, your family, and your business protected from these financial and legal mistakes? If you want to discuss an operating agreement, shareholder agreement, wealth protection plan, or estate plan for you and your business, give me a call.