Starting the first business, whether big or small, is a significant milestone for any entrepreneur. You’ve spent months or even years creating your business plan, exhausted all of your options for funding, hyped your business up with friends and family, and now you’ve finally flipped the sign to ‘Open’ (whether literally or figuratively).
You probably already know of the challenges that lie ahead and have prepared yourself to handle them. However, it’s easier to handle business challenges when they don’t exist at all, especially when it comes to finances.
Here are the common financial mistakes that entrepreneurs make and the ways you can avoid committing them:
1. Not separating personal and business finances
This is a common mistake that small business owners are guilty of, especially those who are not fully committed to their business yet to create a separate bank account for it. However, it’s better to have a separate bank account for your business from the get-go; if the business fails, there’s no harm in having an extra bank account, but if the business succeeds, you already have a separate account and a corresponding history for your business transactions.
It’s easy to apply for a checking account online, so there is no reason to not keep your personal and business finances separate. Even if you’re not a hundred percent confident that the business will fly, it will be easier to keep track of your business transactions you have a separate account for them.
2. Making large purchases for yourself
Say that your business grows exponentially, faster than you were expecting, in fact. Money is coming in steadily and customers are coming through the door at a steady rate. As such, your business looks to only go higher from here on out–but how can you be so sure of that?
There are too many variables to consider when you are a new business owner, even after a year into operations. There may be unexpected occurrences along the way that take large chunks out of your bank accounts. And when you’ve just bought a new car or went on a two-week-long vacation, you may not have enough money to finance your business needs in case of an emergency.
With that in mind, hold off on making huge personal expenses until you’ve built up a healthy safety net for your business.
3. Going immediately all out on your business
It’s perfectly understandable if you want to pull out all the stops for your new business. After all, you want it to succeed, and so you would settle for only the best for it, be it software, hardware, equipment, or people. However, making large purchases for your business need to be timed right–yes, even if you think they are great investments.
Instead of blowing all of your capital, prioritize the expenses that will generate the most revenue in the short-term. Consider the major expenses that are vital to your business first, and other essential but non-mission-critical expenses second. Things like lavish team-building trips, unnecessary electronics, all-too-flashy laptops, and other non-essential expenses should be held off, at least for now.
4. Failure to build a safety net
A safety net is essential for every business, especially new SMBs that are standing on newborn calf legs. Things are almost always unstable at the beginning of every business, which is exactly the reason why businesses need something to fall back on in case things go south.
Failure to build a safety net means that there is nothing to save you in case of unexpected expenses, except maybe incurring even more debt to pay for them. As a result, your financial risk is higher, making it more difficult to operate with confidence and even putting your personal finances at risk.
A good rule of thumb is to save at least three to six months of business operating expenses in an emergency or contingency fund. In this way, you have a fallback in case of an unexpected and large expense, and you won’t have to stay awake at night thinking about what could go wrong.
5. DIY-ing the bookkeeping
Many new business owners want to save money by trying to do everything themselves, including the daunting task of bookkeeping. On top of other business responsibilities, trying to manage the books yourself may do more harm than good. Mistakes are often made, especially if you don’t have that much experience in bookkeeping or accounting in general. Hence, it’s better to hire a professional accountant for this task to both keep your books in order and take the responsibility off your hands.
There are a lot of mistakes that many beginner entrepreneurs make with their small businesses, and this is especially true when it comes to finances. To keep your money in good shape and avoid unnecessary headaches, be mindful of these rookie mistakes and be proactive in avoiding them.