by Michelle Cote
So you’re opening a new dance studio, you’re excited, and you’re sure the location and space will work. In my work as an accountant, I’ve seen small-business owners—both new and existing—make various financial mistakes. Here a few common mistakes to watch out for:
Undercharging. New business owners frequently undercharge for services, hoping to keep clients happy. But undercharging sets you up for failure. Your business plan should outline the fees you’ll need to charge to be profitable. Research dance studio fees in your area, and charge at least that amount. Don’t undersell yourself.
Starting underfunded. A common problem is not starting with enough capital—that is, at least three to four months’ worth of studio expenses. Make sure to build your loan costs (if applicable) into your budget, and remember they’ll affect cash flow; both principal and interest will need to be paid back during your studio’s first few years. Don’t resort to paying interest only. This draws out repayment, increases your debt, and hampers your studio’s ability to flourish.
Relying on the business to support you in the first year (or three). Expect that in its early stages your studio will not be profitable, and don’t rely on it, at first, to support your family. This is the normal life cycle of most businesses—you must plan for it. Small-business owners who haven’t planned for losses in the beginning tend to make short-sighted decisions, such as not doing payroll or paying state sales tax, that get them into trouble.
Misclassifying employees as subcontractors. It’s cheaper to pay teachers and administrators as subcontractors than it is to put them on payroll. But in most cases, people who work in your core business (for example, teaching dance or running your studio office) must be classified as employees. This costs extra money—payroll taxes can add 15 percent to a salary—but misclassifying employees puts your business at risk with many government agencies for legal and financial problems and huge penalties. If you get caught, the costs could shut down your business.
Doing payroll yourself. It’s hard to spend money in the beginning when finances are tight. Still, shop around for the best price (this weekly charge will add up fast) and hire a payroll company. Payroll is complicated, with multiple deadlines every pay period, and penalties are large if you’re late or do it wrong.
Not hiring an accountant. My final wish for you, as a new small-business owner, is that you hire a good accountant who will be your partner. You’ll want someone you can call with financial questions, and there will be many: should I incorporate, and how? Do I need to collect sales tax? Should I borrow money from the bank or my family? And how should I do my bookkeeping? In upcoming columns, I’ll discuss some of these questions, but there’s no substitute for being able to call an accountant who is familiar with you and your business.
Michelle Cote, CPA, holds a BA in economics and an MA in accounting. She specializes in small-business tax and consulting for Dennis & Associates in Quincy, Massachusetts. She loves to help small businesses become successful.