Alok Patnia founded Taxmantra.com, an expert in tax advisory & compliance. He is a Chartered Accountant having prior exposure with Ernst & Young & KPMG.
Planning a Startup? Though starting your own business venture is an alluring thought but at the same time it is full of challenges.
Market research, funding, financials, taxation, payback period, hiring, are some the top factors on the list which needs to be addressed before you start off.
The first year of every business is very important and decisions taken in this phase can have far reaching consequences. This article covers the most Common Mistakes To Avoid While Starting Up Your Business with a little diligence and some inside knowledge.
Inadequate market research
Market research is one of the critical factors which are generally ignored by majority of the startups. They follow existing trends and patterns and competitor information, rather than spending on market research tools. You have to get a deep understanding of the market before getting into it as today’s market is dynamic and trends are changing continuously.
Market data such as size of the target customer base, competitor’s information, external business environment will be required by you and should be studied carefully. You need to check if the market is ready for your product. A thorough market study and research will let you know of the market challenges and limitations of your idea.
Scaling up too early
Once you have launched your business, it needs to be scaled up to make the business grow. However, the process of scaling up should be slow and steady. You should first predict the demand and then only jump to volume. Unnecessary scaling up can drain your cash and actually reduce your overall profitability.
You may incur significant up-front costs in terms of financing of large inventories to meet new customer demand, hiring people, office space, marketing. Make short term goals, and try to perfect your product rather than expanding in the initial phase.
Never put yourself in a situation where if the economy stumbles, you’ll be unable to pay back your loans.
Not understanding your tax laws and obligations
Dealing with the taxes is inevitable as well as tricky and time consuming process. For business owners this process is even more complicated. To avoid troubles you have to plan and pay your taxes on time otherwise you may have to face harsh penalties. Below are some of the crucial points about which every new business should be aware off.
- Recording your business expenses: Expenses incurred in running any business is allowed as deduction against revenues generated. This implies that any expenditure incurred let’s say Rs. 100 may save tax up to Rs. 30.90, depending upon the tax bracket in which the assessee falls. So, a proper record of all expenses is required to claim deductions.
- The preliminary expenses deduction: The start-up expenses / preliminary expenses are allowed as deduction under section 35D of the Income Tax Act, 1961 to an Indian Resident company. The preliminary expenses such as expenditure related to preparation of feasibility and project report, conducting market surveys, and engineering expenses incurred prior to commencement of business are allowed. The deduction is allowed in five equal installments in each of the five successive years beginning with the year in which the business commences.
- Home office Deduction: If you want to opt for home as your work place, you can deduct the related expenses like depreciation, property taxes, electricity bills, against business/profession revenues, but you might have to forgo the exemption on long term capital at the time of sale of such office (residential premise) offered by section 54 or 54F.
- Choosing the wrong entity structure: You may opt for sole proprietor, partnership, or LLP or a company as the legal entity for your new business. Decision about choosing a business structure is technical and complex, but it can have far-reaching consequences for your business especially in the matters of taxation. You should know the tax laws associated with each of the entities and opt for the one best suited for your business.
- Not taking professional advice: You must seek professional advice while choosing the entity structure for your business and after you get incorporated and your business is established so that you get all the tax benefits and don’t miss out any tax obligations. A business may be liable to pay variety of taxes like VAT, CST, TDS, service tax, professional tax, advance tax, etc depending upon the circumstances. An expert will be able to understand the complexity of the tax code and the various compliance requirements you may be subject to. You as a business owner must always be connected to your core competency and delegate other crucial tasks to others.
Inadequate cash reserves
You should have enough cash to carry you through the first six months or so before your business starts making money. It is also very important to estimate how long it will take for your business to earn money. Make a contingency fund to take care of 6-8 months of expenses and try to be debt-free before you start. This will also help you in case you need funding for your venture. Consider both business and personal living expenses when determining how much cash you will need.
High expectations for funding
Many entrepreneurs keep high expectations when it comes to the funds needed to start a business. They often lack the necessary start-up funds and can’t come up with adequate financing. Some entrepreneurs even though they don’t have cash or liquid assets of their own, they expect that a bank or other small investor will provide them with 100 percent financing. But, it’s not easy to get financing unless that owner himself is investing a significant portion of his or her own funds, or maintaining a good credit record and has the means to pay back the loan.
Apart from above mistakes discussed above, the others include not maintaining adequate bookkeeping, mixing your personal finances with business, late filing of taxes, incorrect pricing of the product or services and over reliance on few customers. If you are starting your venture, it’s always beneficial to learn about these common pitfalls and take adequate steps to avoid them.
We are always there to help you, whether while starting up or in day to day tax compliances. Just call us at +91 9038335433 or emails us at ( [email protected]).