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You may have the best idea in the world for your start-up business: a unique product, a can’t-miss marketing plan, and a supportive team willing to give it their all. But if you mismanage your finances, all your hard work and seed money will be wasted. Here are some common mistakes entrepreneurs make. Avoid these financial traps, and you’ll have a much better chance of succeeding.Starting Without a Plan
“Failing to plan is planning to fail.” This saying is especially true for small businesses. Before you make the commitment to start a company, you need a detailed business plan that includes projections of how much money you expect to take in, what your expenses will be, where your start-up funds will come from, and many other factors. Be conservative in your projections and build in lots of room for unexpected expenses or market reversals. The SBA has an online tool to help you draft a business plan. Starting without one is like flying blind.
Insufficient Cash Reserves Launching a business requires a positive attitude, but entrepreneurs who are too optimistic are likely to run out of cash. Before you open the doors, make sure you have at least six months’ worth of operating expenses in the bank. Otherwise, when you’re faced with a financial crisis, you’ll have to make some hard choices: going into debt to stay afloat, tapping your personal assets, or closing the doors.Ignoring Risk
Businesses face risk every day, from lawsuits and employee fraud to natural disasters. Manage your risk by consulting an insurance agent who specializes in business policies, and make sure you have enough liability, property and casualty insurance. Then incorporate your business, so that if your company is held liable in a lawsuit, or some other mishap occurs, your personal assets will be protected. It’s better to pay a little money for insurance and incorporation than to risk a financial disaster.Bad Bookkeeping Habits
Financial records are vital to the success of your business. A good set of books can help you see the difference between revenue (gross sales) and profits (what’s left over after expenses), showing whether you’re making money or fooling yourself. They can tell you which activities pay off and which are losers, so you can allocate your resources properly. Failing to keep accurate financial records can make it nearly impossible to get credit from your bank or from outside investors, and can even get you into trouble with taxing authorities. Losing track of when your bills are due (accounts payable) can ruin your credit rating and result in past-due fees, and losing track of what other people owe you (accounts receivable) can be even worse. Invest in some basic accounting software, make sure to post all transactions as soon as they occur, and hire a bookkeeper if necessary to help you make sense of the reports.Mixing Personal and Business Money
When you’re first starting out and money is tight, it can be tempting to take whatever cash is available and apply it where it’s needed most, whether it comes from personal or business sources. This can be a major mistake for several reasons, and incurring the wrath of the IRS is one of the worst. The tax code allows you to deduct business expenses, but if you use a business credit card or bank account to pay for personal expenses, the IRS will come down on you. On the other hand, if you use personal funds for business expenses and forget to log them into your business accounting system, you’ll miss out on valuable deductions. Keep separate bank accounts and credit cards for business and personal use. This also gives you a clearer picture of how much money your business is actually making.Not Drawing a Salary
If your business is just getting off the ground, you might think you’re helping out by not paying yourself a salary, but the reverse is probably true. If you treat your business bank account like your personal ATM and take out cash whenever you need it to cover personal expenses, you’re hurting the company’s cash flow. This depletes the reserves it might need to handle an emergency or to take advantage of an opportunity that requires an investment of capital. On the other hand, if you leave all the profits in the business and fail to take anything out, your personal finances and credit rating may suffer. Decide on a salary that’s fair, and take it every month. If you can’t afford to pay yourself, you need to revisit your business plan and see where you can increase sales or reduce expenses.Debt Burden
If you haven’t planned properly, or if you use up your cash reserves, you may find yourself needing to borrow money. It may be tempting to use credit cards to buy what you need, but high interest rates and annual fees should make them the alternative of last resort. Trying to keep up with credit card debt can drag your company down. Discuss your cash flow problems with your banker. If your business plan is sound, you may qualify for a small business loan or a line of credit to help you over the rough patch.Overspending
It’s important to invest in your business, but spending on nonessentials can use up the cash reserves you need to keep going and growing. Remember, Microsoft, Apple and Disney all started in someone’s garage, so you don’t need a fancy suite of offices in order to succeed. Hire the minimum number of people, and don’t bring on anyone else until it’s really necessary. Look for other ways to trim expenses and run lean: buy used equipment, share office or warehouse space, and barter with other start-ups for necessities.
Avoiding these common financial mistakes will not only increase your chances of success, but will also reduce your stress level. Instead of worrying about money, you can focus your time, effort and energy on achieving your business goals and becoming a successful entrepreneur. Isn’t that why you wanted to be a business owner in the first place?