Money Mistakes New Entrepreneurs Should Avoid
Starting a business or launching a startup is an exciting time for any entrepreneur. Ideally, you’ll have the skillset to develop a business plan that also outlines your financial goals. However, it is very easy to make financial mistakes when you’re first starting.
Unfortunately, major financial mistakes early on can cause your new business to shut down early. It can also cause you personal financial setbacks that could negatively impact you for the rest of your life.
If you’re launching a new business, there are certain financial mistakes you’re going to want to avoid. Some of the most common financial mistakes new entrepreneurs need to avoid are below.
Mixing Business with Personal Finance
One mistake many new entrepreneurs make is not keeping their business accounts separate from their personal accounts. This creates scenarios where there isn’t any clear distinction between finances, which can hurt you if you’re putting all your money towards the business and not keeping anything for personal matters. This creates a really bad scenario if your business suddenly goes under.
As soon as possible, create a separate account for all things business-related. Any business purchases should come directly from this account. As much as possible, avoid tapping into personal funds. Also, if you have employees, make sure all of their pay comes from your business accounts. And don’t forget to pay yourself!
It is possible to do too much, too soon. Some entrepreneurs hit the ground running and invest too much into their new project. They spend all of their savings getting their business started, but then struggle to earn the profit needed to keep their business running. If they’re unable to bring in revenue, they’re unable to continue to develop their products. And, because they overinvested, they also don’t have savings to use.
The best way to avoid overinvesting is to create a startup budget. Think about all monthly expenses, as well as monthly sales. Use an IRR calculator to calculate your internal rate of return to evaluate how successful your project might be.
Not Spending Enough
On the flip side, it is also possible to not spend enough on your startup. Some entrepreneurs try to cut costs. Unfortunately, cutting corners can sometimes be just as dangerous as overinvesting. For example, some entrepreneurs try to develop their websites or marketing plans, even if they don’t have any experience in that area. Without a strong marketing plan, they end up not being able to make sales because people don’t know about their products.
Whenever you create a startup budget, it is important to think about what can and cannot be cut. You might not need a fancy office space, but you probably shouldn’t go without a website or marketing plan.
Lack of Backup Plan
Even if you have a strong business plan that details financial matters, you should always have a plan B. Many new entrepreneurs make the mistake of thinking that there is no way that they’re going to fail. When profits aren’t what they anticipated, they end up panicking and making financial mistakes because they didn’t have a backup plan.
You should always have some sort of succession plan for what happens if your business fails. This could mean having insurance, knowing of a larger business that might be interested in purchasing yours, or having a buy-sell agreement. Ideally, you won’t have to use it — but you won’t want to get caught without one!
Hiring Too Quickly
If your startup is going well, you might decide to hire some more employees so that you can be more productive! However, keep in mind that you’re also going to have to pay those employees. If you hire people but do not increase your profits, you still have to find a way to pay them — this could result in you struggling financially.
Before you hire someone new, make sure that you have the funds available to pay them. Also, consider if you need that employee full-time. For example, when it comes to having someone develop your website, you might want to consider outsourcing the development and then maintain the website yourself.
There are low-cost resources available to you as an entrepreneur that will help your business be as successful as possible. For example, most towns and cities have a Chamber of Commerce. Joining a Chamber of Commerce allows you to meet other business owners that may have advice on how to make your business more successful. It also allows you to network with potential customers within your community.
To find out what resources are available in your city, reach out to the city government or look online. Most entrepreneurs should start with their local Chamber of Commerce, but as your business grows more successful, you may want to look into surrounding towns as well.
Going Above Means
As your startup takes off, it might be tempting to rent a luxury office space or buy the best office equipment available. After all, having the best of the best will only help your business succeed, right? However, going above your current means can quickly drain your business funds.
When you’re just starting, you may not be able to immediately splurge on that expensive printer or buy prime office real estate. Even as your business continues to grow, you will want to stay within your means. This all comes back to the need to create a strong business budget. A budget is the best way to make sure your business has a strong financial future.
When it comes to starting your own business, don’t make the mistake of going without a budget plan. Going without a budget will cause you to make financial mistakes that will jeopardize the success of your business.
If you’re unsure of where to start with developing a budget, consider taking a course in business management. Not only will this teach you how to develop an initial budget, but it will also help you learn how to manage the overall finances of your business.