Stoic pose by florist

Challenges to Overcome During Your First Year of Business

10+ min read • Mar 24, 2021 • Derek Miller

There may not be anything more exciting than stepping out to start a business of your own. While “being your own boss” can be stressful and exhausting, many people also find the process incredibly rewarding. 

In fact, multiple studies have found that small business owners are happier—and healthier—than traditional employees. Data from the Centers for Disease Control and Prevention (CDC) and the US Census found that the health of a community improves when the number of small businesses in the area increases. 

While you might feel exhilarated as you strike out on your own, the road ahead isn’t going to be easy. Business owners face countless challenges, especially during their first year in operation. Consider a few of these common issues and develop plans now to solve them, overcome them, or face them head-on.

Securing Funding for Your Operations

Securing capital is one of the biggest challenges facing new business owners. Funding is the money needed to cover basic expenses as you get your business up and running. 

For many business owners, this need for cash is a catch-22: you need money to pay for equipment and inventory, but you can’t make money without the equipment and inventory. As a result, would-be entrepreneurs turn to various funding methods to get the capital needed to cover expenses until they start generating revenue from the business itself. 

You have multiple options available as you seek funding for your business. Each of these options comes with different pros and cons depending on your budget and goals for growth. 

  • Seek a business loan. If you lack the needed funds to start your business, work with a financial institution to secure a business loan. You can work with these creditors on a reasonable monthly payment plan with flexible interest rates and terms. Lendio curates multiple loan types for business owners to review and apply for—making it an invaluable resource for new business owners looking to use a loan to fund their startup.
  • Work with private investors. Angel investors and venture capitalists are always looking for the “next great idea.” Some investors won’t expect payment for a few years as your business grows, giving you the flexibility you need to spend that money. However, they may want regular reports on your performance and can also request a say in the decision-making process because of their shareholder status. 
  • Bootstrap your business. Bootstrapping occurs when you pull funds from your own pocket to start a business and operate that company as lean as possible. With this type of funding, you won’t have additional fees or interest to repay—but few people have the liquid capital on hand to cover all of their costs for the first few years. 
  • Crowdfund from the community. Crowdfunding has become increasingly popular to raise money for your business. With this model, dozens of people from the community donate to your business idea. You can either pay these people back or offer discounts for donors who support your company.  

You’ll likely seek out multiple options to fund your business. For example, you may start by self-funding the business and reaching out to friends, family, and colleagues to become private investors, too. This solution may work in the beginning as you bootstrap, but you may also seek a business loan when you need to invest in new equipment or begin to scale.

Creating a Realistic Operating Budget

Florist using tablet

 

It’s inevitable that you’re going to face problems during your first year. From misprinted business cards to a hacked e-commerce website, millions of potential challenges await you—all with varying severity.

However, the most common and threatening issues are related to money and your financial health. It’s estimated that 82% of businesses fail due to poor cash management—so taking a proactive approach to managing your money within your first year is critical. 

Creating and sticking with a budget is an important step in keeping your business afloat in—and beyond—your first year. This process includes not just setting a budget but also understanding when you need to adjust your spending.

There are a few ways to set yourself up for financial success, even if you aren’t an accountant. The first thing to do: get organized. Ensure that you have a process for tracking your expenses and labeling each purchase so you can sort through them later. (This will also be immensely helpful during tax season.) Once you have transparency, you can start adjusting your levers and setting budget goals and expense expectations. 

Developing a business operating budget isn’t that much different from managing your personal expenses. If you want to save money, you review where your income goes and learn what can be cut and what needs to stay. Businesses also work through this process, trimming certain expenses and expanding others in order to maximize profits. 

One thing to keep in mind during this budget development process: your priorities and needs are going to change. You’ll need to spend more, for example, during peak seasons to advertise more or scale inventory.

Your budget will also change alongside your business acumen. The more you know about your brand and the market, the better financial goals you can set. 

If developing and managing a budget still feels intimidating, consider consulting with an accountant or looking into budgeting software. You can also take advantage of online resources and financial courses to help you gain more confidence in managing finances within your business.

Paying Taxes Accurately and Strategically

Filing taxes is a source of stress for many Americans, even those who have full-time employment with a single company. One survey asked 500 people how many tax brackets there currently are—and 90% of respondents answered incorrectly. 

Some people are afraid of underpaying and being audited, while others feel confused by the IRS verbiage—so they rush through their forms or hand off their documents to an accountant. 

As you launch your small business, taxes will become more important—and more complex. You’ll have to pay different amounts if you’re self-employed, and you’ll have to maintain a list of deductions to report as business expenses. 

Even when you have these nuances figured out, you may come across other challenges and requirements as you begin to scale and hire employees. 

Tracking deductions is one of the hardest—and most important—steps in tax preparation. The government frequently creates new rules for what can be deducted and by what amount, so it can sometimes feel like trying to hit a moving target. 

However, there are some standard deductions (marketing expenses, insurance costs, education, etc.) that you can write off. As you begin to file your taxes, identify which expenses can qualify as deductions in order to reduce how much you need to pay. 

The good news: if you take time in your first year to categorize your expenses correctly and develop good bookkeeping habits, you can put yourself in a great position for tax season. These steps can help you to build a sound foundation for scaling your business for many years to come, too.

Optimizing Your Business for Profitability

Florist checking through inventory

 

As you grow your business, you’ll discover that you have multiple levers to pull to increase profitability. You can save money by reducing costs, thus growing your income, or you can adjust your products and prices to increase your margins. 

Companies make minor adjustments to their product lines frequently. They debut new items to appeal to customers (like the luxury face mask trend of 2020) and change their products to meet customer demand (like fast-food chains going “all-natural”). 

Within the first few months of opening, you may decide that you need to change up your products to help your business succeed. Fortunately, there are many ways to do this. A few options at your disposal include: 

  • Eliminating products and services that don’t sell (does your pizza restaurant really need a hamburger on the menu?)
  • Eliminating items with low profit margins (high-cost items, products that take a long time to make, or items from vendors with difficult contracts, for example) 
  • Launching new items based on trends and customer demand (what brunch restaurant doesn’t offer avocado toast?)
  • Creating product bundles to sell high-margin items along with low-margin products
  • Negotiating better deals with your vendors to pay less for goods
  • Adjusting your materials sourcing and costs to pay less before assembling your products
  • Investing in technology to speed up the production process and scale your abilities 

As you can see, many factors affect the profitability of your business. You have the final price that you list your product to sell but also the costs of labor and materials to assemble these products. 

Over your first year in business—and likely beyond—you will need to continue to adjust and optimize your products or services, as well as the resources invested in them, to improve your bottom line.

Developing a Long-Term Marketing Plan

Florist Smiling while working

 

In the same way that your products and services will likely change as your business grows, so will your marketing strategy. In fact, as you consider how you promote your business, you might develop a 3-part plan: pre-launch, launch, and post-launch/maturation. 

During the pre-launch process, your main focus may be on name recognition and making customers aware that your business is about to exist. (Think about a new building under construction in your town. They want you to know what’s being constructed and when it will open.) 

The goals for your marketing efforts will likely focus on maximizing your reach (getting in front of a large number of people) and connecting with potential customers on social media and via email so you’re top-of-mind when you eventually open.

When your business launches, your marketing goals will change. During this period, your goal is to bring in new customers to try out your brand. Your marketing expenses might go up during this time, as new customer acquisition is costlier than customer retention

Unfortunately, until people actually try your products and decide that they like them, you won’t have any existing customers to remarket to. Throughout this process, your main goals should include turning the target audience you developed earlier into potential leads, which are then converted to customers. 

Once your business starts to mature and you develop a healthy customer base (typically 6 months to a year in operation), you can adjust your marketing materials for long-term success. This means striking a balance between retaining the customers you brought in during your launch and encouraging new ones to try your brand. 

Some business owners seek marketing firms that specialize in business openings and product launches. These experts can make sure your business gets noticed when you open, ensuring that you hit the ground running. From there, you can develop a marketing plan that aligns with your long-term budget and goals. 

Hiring Employees and Growing Your Team

Florist working hard

 

Once your business starts growing and your customers fall in love with your products, you can start to expand. At this point, you don’t have to do everything yourself—you can delegate to professional marketers, expert accountants, and others who can step in and take work off of your plate. 

It’s during this time that you might consider taking on an employee or expanding your existing staff with new members. This can also become a source of stress for some entrepreneurs who don’t know if they have the budget to justify the cost of a new worker. 

Neil Patel created a useful guide for determining when your company is ready for a new hire. His main indicator: you’ve had to turn down work from customers or can’t fill the existing demand for your products or services. 

Turning down work doesn’t always mean your customer will come back when you’re ready for them. You could lose customers in the long run if you can’t scale your efforts to meet their needs. 

Think again about the cost of acquiring a new customer versus retaining one. Once you start limiting your existing customers or turning leads away, your company is losing money while its marketing costs are increasing. Don’t think of your new hire as an additional expense but rather an asset to help you scale. 

Fortunately, there are multiple options for taking on additional talent. You can contract out work until you have enough demand to bring on a full-time employee. You can also take on paid interns to help with basic work and then train them to become staff. Finally, you can hire part-time work with the goal of bringing them on full time once your business grows into it. 

Remember, taking on a new hire isn’t just an expense or opportunity for growth—they’ll also take time from you. You’ll need to train them, manage them, and work alongside them to meet the demand of your customers. This requires a certain degree of emotional intelligence if you strive to be a manager that people want to keep working for. 

Additional Challenges Entrepreneurs Face

Florist adding new flower bed

 

While this guide has covered many of the big issues that new business owners worry about, you’ll also need to overcome several miscellaneous challenges during your first year. A few common tasks and mishaps that business owners face include:

  • Creating company documents and infrastructure. Within the first year, you’ll likely create a company handbook as well as several policies and rules for how your business operates. 
  • Investing in the right tools and software. It’s hard to know what’s on the market and able to help you, from choosing a good financial management app to setting up widgets and plug-ins for your website. 
  • Finding quality networking opportunities and forming partnerships. It’ll take time to find networking groups within your community that can benefit you. However, once you make these connections, you can grow your business. 
  • Developing safety procedures and cybersecurity training. You’ll need to make sure your employees are safe—along with your digital assets and sensitive financial information.   
  • Identifying your competitors and your relationship with them. Some companies work well alongside their competition, while others face challenges—and even direct attacks. 
  • Establishing a work-life balance. Opening a business is a marathon, not a sprint. Learn how to take time off to recharge so you can move your business forward. 

Each of these challenges can be overcome with creative problem-solving and a determination to move your company forward. 

Launch Your Business With an Eagerness to Learn

Florist looking toward the future

 

Each new business owner will face unique challenges and roadblocks during the first year. For some people, the idea of managing the company’s ledgers and tax forms is overwhelming. For others, managing employees or handling customer feedback can create stress. 

However, if you can identify and admit your weaknesses, you can take steps to resolve them or at least mitigate their risks. The best way to survive your first year in business and to continue growing for years to come is always to be eager to learn—even if it’s from your mistakes.

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Derek Miller

Derek Miller is the CMO of Smack Apparel, the content guru at Great.com, the co-founder of Lofty Llama, and a marketing consultant for small businesses. He specializes in entrepreneurship, small business, and digital marketing, and his work has been featured in sites like Entrepreneur, GoDaddy, Score.org, and StartupCamp.