Small business and professional services are most at risk to even minor economic setbacks. Those setbacks could be a recession, loss of a major customer, or minor mistakes in marketing. However, small business owners, when facing financial distress, compound the problem or needlessly waste resources. These mistakes small business owners make can end up crippling or scuttling the business enterprise.
One of the main problems why small business can’t weather economic setbacks is they have too much debt. Many small business owners, those that eventually become clients, routinely make these two mistakes as they try to stay afloat: (1) Not pay payroll tax; and (2) withdraw from retirement accounts to continuing funding business operations.
Mistake 1: Not paying payroll tax deposits.
Without exception, most small business owners I work with have failed to pay payroll tax at some point. When asked why, the reason is always is the same: “I did not have enough money to pay payroll tax and pay expenses needed to operate?”
Why is it a mistake? Most likely, the main issue hurting the business is debt. Not paying payroll tax only creates new debt. Payroll tax debt is dangerous to the business. It is very difficult to catch up, and the IRS is aggressive. The IRS position on is that not paying payroll taxes is theft from your employees (and it is). Not paying payroll tax is a shortsighted solution. You pay your other bills, but rarely does a business fully recover after going down the road of not paying payroll tax. The worst-case scenario is the IRS closing the business (that does sometimes happen).
Mistake 2: Withdrawing or borrowing from retirement accounts.
I wish my clients would come to me sooner. By the time they finally seek help, they have no savings and no retirement. They used everything they had to stay afloat, only to end up in the same place. I know it is tough, I know it is difficult; but you must resist the temptation to raid your retirement.
Why is it a mistake? Your creditors cannot touch your retirement accounts. If you file bankruptcy, the court cannot take your retirement account. As such, your retirement account is not an at risk asset should business not improve. Focus on the core problem, your business. That may involve dealing with existing business debt, aggressively seeking new customers, or looking for an exit plan.
The solution is to seek help as soon as you feel the urge to take either of the above actions. It is much easier to get a business back on its feet when the issues are the ballooning credit card debt, business lines of credit, personal guarantees and what not and when the business or owners still have resources to address the problem.