You don’t have to be alone in a dark, scary house or visiting a graveyard at midnight to be haunted by the ghost of bad business decisions past.
Here are five management mistakes that should send chills down your spine. Are you guilty of any of these ghoulish gaffes?
Mistake #1: Not knowing the difference between an employee and an independent contractor. Many entrepreneurs outsource to freelancers or independent contractors to get work done. But the IRS might decide those independent contractors are actually employees based on how you treat, pay and work with them. If you misclassify an employee as an independent contractor, you could face stiff penalties.
The IRS uses three characteristics to determine whether a worker is an employee or independent contractor:
- Behavioral control: Does your business control the way the worker does the job (through training, instruction or other means)? If so, the person is probably an employee. If you just tell them the results you want and leave the steps up to them, the person is probably an independent contractor.
- Financial control: Does your business control the financial and business aspects of the worker’s job? If the worker buys his or her own equipment, can make a profit or take a loss, and invoices you for work, he or she is probably an independent contractor.
- Type of relationship: Do you have a contract with the person on a per-project basis, or is the person working for you indefinitely? The former is probably a contractor; the latter, an employee.
This can be a complex issue, so visit the IRS website for more guidance.
Mistake #2: Not doing a background check. When you finally find the perfect employee, you’re probably so excited that a background check is the last thing on your mind. But failing to do background checks can cost you more in the long run if an employee steals from you, does something that sparks a lawsuit from other employees or simply doesn’t work out for reasons you might have easily discovered by doing your homework in the first place.
Start with the basics: Contact candidates' references, and verify their past employment, education, degrees and certificates. Depending on the job duties, you may want to complete additional background checks, such as criminal records, driving records or credit history. The rules regulating what information you can and can’t access for background checks and what you need to get permission for vary depending on federal, state, local and job-specific laws, so it’s best to ask your lawyer for advice. Using an outside firm to handle background checks could save you some time and headaches since they'll make sure everything is done according to the law.
Mistake #3: Not monitoring your cash flow. If you never balance your personal checkbook or check your bank balance, you’ve probably bounced a few checks here and there. If you don’t monitor your business’s cash flow, however, the result can be far worse than a few overdraft fees.
Cash flow is the lifeblood of your business, and monitoring it helps you stay on top of whether your business is healthy … or needs major surgery. These days, accounting software makes it simple to monitor your company’s cash flow, so there’s really no excuse for neglecting it. Find out whether your bank enables you to integrate your accounting software with your business bank account so you can see the status of deposits, withdrawals and more in real time.
Keeping an eye on your cash flow weekly or even daily gives you an early warning system. That way, when invoices aren't getting paid or a big payment is coming due, you can take immediate action—whether that’s following up with the customer to nudge the payment along or transferring funds so you can cover the cost.
Mistake #4: Not systematizing processes. Business success today is all about making the most of your time and boosting your and your employees’ productivity. To do that, you need systems. Systematizing processes in your business serves several purposes: It provides consistency (ensuring your product or service is always made/delivered the same way, to the same quality standards), helps train employees (by following the systems, they always know what to do), and saves time (because no one has to reinvent the wheel).
You can, and should, systematize everything from how a product is manufactured in your factory to how employees answer the phone at your business to the replies that you send to common email inquiries. Collect your systems in your operations manual, and keep it online so your employees can refer to it anytime.
Mistake #5: Not thinking your proposals or estimates all the way through. Pricing your products and services can be tough when your business is in the early stages. Years ago, when one of my business’s first clients asked for a proposal for a big project, my partners and I basically pulled a number that sounded good to us out of thin air. Eighteen months later, when we'd finally completed the project, my partner tallied our hours and estimated we'd made 1/20th of our standard going rate on the job. Fortunately, the experience we gained was priceless as we learned to build caps and steps into our proposals to ensure that the scope of future projects didn’t spiral out of control as that one did. (In other words, we systematized.)
If your business requires estimates or proposals, be sure you carefully think through every aspect of the job based on past projects, worst-case scenarios and more. Don’t be afraid to ask questions—and never assume.
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