If your startup is gaining traction, congratulations! You’ve overcome one of the hardest parts of launching a new business. But don’t get complacent; now it’s time to scale your operation to meet the demand of your growing customer base. When you’re scaling your startup, however, you must be careful not to make certain missteps that can actually stall your growth. We’ve served many startups and have helped them implement the strategies below, so they are set up for long-term success and rapid growth.
We’ve put together a shortlist of the 10 most common mistakes you should avoid when scaling your startup:
1. Trying to Manage the Accounting Yourself While Scaling Your Startup
Most business owners are used to doing everything themselves. After all, you probably started your business because of a passion or idea that drove you to act. It’s only natural that you want to continue to execute on all fronts as your company grows. But as your business starts to scale, failing to delegate is a very common mistake. You will need to learn how to delegate tasks and manage a team as soon as your cash flow can support it.
In order to grow your business, you need to focus your efforts where you shine and not try to be a superhero by managing it all. Trying to manage everything is a sure path to burnout and a good way to stunt your growth. You became an entrepreneur because you had a passion for something. Focus your efforts on that as soon as you can. It’s a common startup mistake to try to manage everything including administrative processes, accounting, marketing, product development, and sales.
While it can be scary to make an investment in something that isn’t directly revenue-generating, hiring knowledgeable experts to take over administration and accounting can actually help you scale. You’ll be spending less time doing something you don’t like (and let’s be real, most entrepreneurs HATE accounting), which will leave you more time to focus on product development, strategy and growth, ultimately strengthening your bottom line. Plus you’ll have more information about how your business is performing from a financial perspective, so you’ll have key insights you can use to make decisions.
Most importantly, if you are looking to grow your business by securing investor funding, having a history of clean financial data and a reputable professional managing your finances will give you more credibility with potential investors.
Having a knowledgeable second pair of eyes check your work will ensure that your accounting is in order and secure for future development. It’s also a great idea to opt for services like an outsourced financial controller or an outsourced Chief Financial Officer until you can afford to bring a full-time accountant on staff.
The startup founders we work with find tremendous value in using outsourced accounting. Not only is it cheaper than hiring a full-time accountant, but your startup gets the benefit of having an entire finance team at your fingertips. A large majority would tell you that it’s a necessary step to building a successful startup.
2. Not understanding the difference between a W-2 employee and a contractor
When you first start building your team, it’s easy to treat everyone as a contractor. Most entrepreneurs feel this is a good way to “test” out a future hire and reduce the overall administrative burden of managing W2 employees and payroll.
While it may be easy to treat everyone as a contractor, there are some rules on how to classify your workers that must be followed. Not complying with certain regulations could open your company up for legal action and back-owed wages if you face an audit. One of the most common mistakes is classifying an employee as a contractor, but treating them as an employee by setting defined schedules and having expectations outside the realm of a contractor.
The biggest difference between an employee and a contractor is the level of control you have as an employer vs the individual’s ability to make independent decisions, use their own equipment, and set their own schedule. There are certain limitations and benefits that come along with hiring contractors versus employees, but it’s important to note that misclassifying a worker can result in back taxes, fines, penalties and legal disputes.
3. Not understanding where you need to register for payroll compliance
Now that you know when you need to hire a W2 employee vs a contractor, it’s time to get compliant. In order to run payroll for your W2 employees, you need to register your business with the proper agencies. First and foremost, you need to have a valid Employer Identification Number (EIN). You probably already have this since most banks require it to start a business checking account, but if you don’t, you can register for an EIN online through the Internal Revenue Service.
Second, you need to register with the proper state agencies. For payroll compliance, this typically includes registering for a state withholding ID, and a state unemployment ID. Now that remote work and distributed teams are becoming the norm, it’s important that you register in every state where you have an employee living and working. Many entrepreneurs make the common mistake of treating everyone as though they are working at the company headquarters, but to be compliant you need to collect taxes based on where the employee is actually performing the work. Payroll companies like Gusto can step you through the process of registering with the proper agencies when you onboard an employee in a new state. There are also services like CorpNet who will handle the state-by-state registration process for you so you can be hands-off.
4. Not Having Defined Job Roles or an Org Chart
Often times in startups you see people wearing many hats, and working to get things done without a clear indication of their job role. Who’s responsible for what? When a company starts growing quickly, it’s easy for job roles to become blurry. This can cause major problems down the line, so it’s better to clarify defined job roles and responsibilities early on.
Not understanding who does what can impact your ability to develop a collaborative and engaged culture. When new hires (or even seasoned employees) aren’t sure where to go to get their questions answered, they will suffer from a general lack of guidance which can lead to frustration and lack of engagement. Further, without clearly defined roles your company may suffer from lack of accountability, falling into the common business adage “when everyone is accountable, no one is accountable.” Not having clear defined roles can cause a lot of confusion and even a toxic “finger-pointing” work culture.
Besides just keeping things running smoothly, having clear job roles can help with employee recruitment too. When candidates understand the position and exactly what’s expected of them, you’ll be more likely to attract and retain qualified candidates.
5. Ignoring the Onboarding Process
More than one third of employers do not have a structured onboarding process, and it has long term negative effects. One of the biggest mistakes we see are startups that have an ad-hoc nature to onboarding. Instead of having a set system of welcoming the employee, teaching them about the company, training on the role, and giving them details on things like payroll, benefits, and PTO, many companies leave employees to just figure it out on their own. Having a structured process is essential for new employees to feel welcome, to know how to do their job correctly and to meet the expectations of the company. Lack of effort during the onboarding process can lead to high attrition and an overall negative sentiment toward the company. Hiring is an investment of both time and resources; don’t waste them by neglecting your onboarding process!
You Want to Make the Process as Easy as Possible
Don’t pile on paperwork right away. Instead, create a step-by-step onboarding process that leads new employees through the most important information. You can then revisit the more detailed information as needed. We love to implement flows using Gusto that trigger welcome emails and send a step by step flow of information to welcome the employee, inform the employee and motivate them every step of the way.
Don’t forget, just as you seek customer feedback to ensure the success of your service or product, you should also seek employee feedback during the onboarding phase and ongoing at regular checkpoints. During employee onboarding, it’s a good practice to schedule touchpoints at 30, 60, and 90-day intervals. Best practices for ongoing touchpoints are annual at minimum, or semi-annual if you want additional feedback.
6. Not Having Proper Time Tracking Processes in Place
Whether salaried employees should track time is an ongoing debate, but if you have hourly employees finding an easy time tracking tool is an absolute must.
Whatever you do, don’t use spreadsheets to track employees’ time. Spreadsheets are subject to formula errors, can be changed after the payroll is processed, don’t easily support manager approvals, and take extra administrative effort to move the hours from the spreadsheet to the payroll system.
Instead, find a payroll provider that has time tracking integrated into the payroll process. Companies like Gusto know the value of simple time tracking and have built a time tracking tool directly within the payroll platform. Employees can access time tracking on a mobile device or directly from their browser. When payroll time comes, managers can easily approve time which is then directly integrated into payroll.
Further, if you need to track time at the customer or project level for invoicing or internal tracking, Gusto also has this capability.
7. Not Having a Defined Payroll Cycle
While your startup is getting itself off the ground, you may not pay your employees a fixed salary at a specific time each week or each month. Instead, you might make payments based on when the work is done, when your cash flow allows, or (let’s be honest) when you remember you’re supposed to pay them.
Once your company starts to grow, however, you need to implement a defined payroll schedule based on pay periods. A pay period or cycle is the stretch of time over which employee work hours are compiled for later inclusion in a paycheck. This is typically a standardized period, such as a weekly, biweekly, semi-monthly, or monthly period. Having one defined helps both employers and employees to plan accordingly. It also reduces administrative headaches trying to keep track of who got paid and when. By having defined payroll cycles it’s easy to keep track of how much total wages are owed and when they need to be paid.
8. Not Creating a Benefits Package that’s Valuable to your Employees
What are you going to do to attract and keep the talent you need to scale your startup? A benefits package is one of the best ways to ensure that your employees feel valued and fairly compensated for their work.
Recruiting quality candidates for your startup can be easier when you offer a comprehensive compensation package including benefits. At the beginning, it doesn’t need to be elaborate. You don’t have to offer every benefit under the sun. Employees typically value health insurance, dental insurance and retirement benefits, so that is a good place to start. If you can’t yet cover the cost of a health plan, another good option is to offer a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). This type of arrangement allows you to give your employees tax-free reimbursements to cover the cost of health care, while they are still responsible for finding health coverage through an individual plan.
Another common strategy is to offer company stock as a benefit. This ties employees directly to the success of the company, which motivates them to commit to the company’s success over the long term.
As a startup founder, building a team is one of the most important things you’ll do so creating a quality benefit program should be a key consideration as you start to grow your team.
9. Not Implementing a structured PTO and time off policy
Paid leave is a key piece of any healthy, productive, and attractive workplace. Jobseekers consistently rate paid leave as one of the most-desired benefits, and we know that employees who take paid time off and vacations perform better in the workplace.
We commonly see startups delaying the implementation of a structured PTO policy, either because they are nervous about paying wages for time that doesn’t directly translate to business results, or because they simply overlook it.
Adding a paid time off policy makes your employees feel valued, contributes to work-life balance, and also lets both you and your employees plan around time out of the office. Like health and retirement benefits, paid time off also helps you recruit and retain higher quality candidates, further contributing to the success of your team.
10. Not understanding when an owner should or shouldn’t be on Payroll
We are commonly asked questions regarding how an owner should be compensated. In order to decide if a founder should be on payroll or if they should be compensated in another way (such as an owner’s distributions), you should look at the company entity type.
If you are a partnership or an LLC, the owner should not be treated as a W2 employee. Under these structures, the owners receive distributions from the company, which serve as compensation. Under these structures, the owners are assessed payroll taxes on their portion of the company’s earnings, whether or not it was distributed to them. Since the tax is being assessed at the profit level, the founder should not go on payroll and be taxed in the form of payroll compensation.
S Corps and C corps, on the other hand, assess payroll taxes based on W2 compensation. Under these structures, the owners should become a W2 employee and be paid a salary. The owners can also take distributions outside of payroll, but only if the regularly paid salary is considered “reasonable compensation“.
We all know starting your company and gaining traction is an amazing accomplishment. We’re celebrating with you. And now that you know the 10 mistakes most startups make, you can navigate the journey to scaling with valuable insights to avoid stalling your growth. We want to ensure your success, so we’ve put together an onboarding checklist to help with one of the most difficult steps in ensuring your success – onboarding new employees. If you feel you need any additional help with your startup, feel free to reach out to our team. We’re ready to help, and we’re thrilled to be on this journey with you.