One trait that sharply differentiates the seasoned entrepreneurs from the wantrepreneurs of the world is their willingness to take calculated risks. Entrepreneurs tend to look for every opportunity to push the boundaries and discover new things about both themselves and the industries they care deeply about.
They’re excellent problem-solvers, they test their recognized limits, they cross boundaries, and they sail towards uncharted waters.
However, that same willingness to routinely take risks also makes them more likely to make mistakes.
Some failures and mistakes are minor and can be corrected on the fly. But some, especially those that concern money can easily burn the house down, so to speak. It’s a big reason why the vast majority of startups fail during their first few years of operation.
Here are the biggest financial mistakes new business owners tend to make, and how to avoid them at all cost.
Not Having Separate Business and Personal Accounts
There’s no shortcut on this issue. Even if you’re striking out on your own as a solopreneur or freelancer, you can’t afford to cut corners on keeping your finances separate. You’ll pay the price later.
Ignore the call of convenience and commit yourself to creating separate savings, checking and credit card accounts for your business before you begin collecting revenue from paying customers. Doing this right at the beginning will make it much easier to do the accounting for your business, plan for taxes and budget for unpredictable months that may lie ahead.
Most importantly, separating your business and personal accounts promotes a very different psychological way of thinking about how your business factors into your life.
Immediately Making Big Purchases for the Business
When you start a new business, it’s understandable to want all the best new laptops, a flashy website, trendy office, best-in-class software and highly talented staff to help grow the company.
However, if you’re itching to make major purchases near the beginning of your business, think these decisions over very carefully. Some expenses like building a website or attending an industry trade show will be mandatory depending upon the type of business you’re starting, but you need to always ask yourself if the expense in question is going to help you generate more revenue in the short-term.
Making Large Personal Purchases
Even if you’ve separated your personal and business accounts, scenarios often emerge that force you to dip into your personal funds to finance a business need, such as an expansion into a new niche or a marketing campaign that promises to deliver a high return for the company.
If you’ve rushed out and purchased a car, home or another large personal expense and your business has something unexpected come up that means you won’t be able to pay yourself next month, you can’t be strapped down with an exorbitant amount of personal expenses. Be as lean as possible in both your business and personal life while growing your new company.
Not Saving for Lean Times and Emergencies
From Benjamin Franklin to today’s best finance experts, there’s no shortage of people telling you to keep an ample stash of savings at hand for unexpected expenses.
Call it saving for a rainy day, but there will be times when something happens and you’ll need to cover the cost urgently. To prepare for such time, it’s wise to keep at least three months worth of expenses in an emergency or contingency fund for both your business and personal expenses.
Not Setting a Clear Budget for Your Business
You may be able to run your business without a clear plan for the future, but you’ll have a very hard time succeeding without at least a rough budget to help guide what you can and cannot afford to spend on each month.
As a founder and manager, your job is to steer your new business towards profitability, and you can only do that if you have a carefully planned budget for operational, marketing and other expenses. Having a clear budget increases financial discipline and clarifies the roadmap to business growth.
Master Your Money Matters
It’s far easier to lose money than it is to earn it.
While a single drastic financial decision can cause a business to fail, failure more often than not follows a series of bad decisions and financial mistakes. You can avoid these mistakes by giving more attention to the details of your personal and business cash flow throughout the year.
Plan your budget, track your expenses, save for emergencies, keep the lines between business and personal clear, and always think of expenses in terms of how they’ll generate future revenue for the company.
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