The Daily MBA has before written about financing when it comes to business. Today Juliana Davies intersects this issue with government policy, explaining how tax breaks work and why startups need more of them if they’re going to ultimately be successful as a whole. Juliana writes for http://www.mbaonline.com, an Internet magazine that seeks to be an educational resource for those interested in MBA education.
For the last four years some startup firms have struggled immensely. The economic recession has crippled annual profits for small businesses, while the American government has been unable to create policies that properly aid these companies. But experts say that successful startup companies are the key to stabilizing the high national unemployment rate and enabling the economy to properly recover — and if the government will not assist small business owners, then they must adopt a more proactive strategy for generating profits.
According to US News & World Report, the poor economy has not curtailed entrepreneurial activities; in 2010, two years after the recession was first reported, an average of 558,000 startup businesses were launched each month (a significant increase over the two previous years). And as big companies have foregone new hiring in order to invest in other resources, such as more advanced technology, small businesses have accounted for roughly two-thirds of U.S. employment. However, half of these startups eventually fail (often within the first year). “And if many of the recent startups are simply filling a void until corporate hiring picks up,” wrote USNWR contributor Rick Newman, “the surge in entrepreneurship could be fleeting.”
Startup firms are disadvantaged in other ways. As Jay S. Fishman of Bloomberg Report recently noted, government regulations require most small businesses to acquire costly permits and licenses in order to get started. To cover these expenses, most entrepreneurs raise funds via venture capital. However, once they have opened for business, these firms must compete with foreign entities that operate under much looser corporate guidelines. And if company owners are unable to recuperate their debts in a timely manner, then the startup is not likely to sustain itself for very long. Fishman argues that an “incubation period”, during which new companies would face fewer taxes and more lenient regulations, would benefit startups and the American economy as a whole. However, in lieu of any major changes to the current system, he warns that the success of a company rests on the practices and habits of its owner(s).
Many of today’s business leaders also offer tips to aid struggling startup enterprises. A recent article in YFS Magazine noted that 70% of small businesses are financed through personal savings or monetary assets, a practice known as ‘bootstrapping,’ but many of them fail because of costly fiscal miscalculations. To mitigate these risks, owners should allow their companies to grow gradually and organically. An emergency fund should be set aside to sustain steady cash flow and reduce the need for moneylenders and credit lines. Owners should not only create a business plan that realistically reflects time and money commitments, but also be willing to adapt to shifting industry trends. Finally, in order to advance, entrepreneurs must practice tight recordkeeping and accurate tax reporting; as Deep Sky Co CEO Michael Hsu writes, “Too many great entrepreneurs with great ideas fail because they simply were not financially feasible.”
In terms of fundraising, Indiegogo CEO Slava Rubin recently told Forbes that venture capitalism is not the only option, thanks to the recent advent of ‘crowdsourcing’. Sites like Odesk, CloudCrowd and Poptent allow entrepreneurs to attract investors, as well as reach out to potential customers. Rubin also urges company owners to avoid wasting time on a thorough business plan; due to the dynamic nature of today’s market, “scenario planning and detailed financial projections” can no longer serve as accurate gauges of business viability. Instead, entrepreneurs should focus on building their brand and delivering products to customers. And once the company is established, owners must continually work to promote it. “Keep marketing your product, and always make sure your customers, friends and communities are updated on your progress,” Slavin writes.
The link between successful startup firms and a thriving national economy has been well established for years. In the absence of amendment to government policies that impact these firms, the key to restoring a healthy market lies in the responsible fiscal practices of small business owners and CEOs.