3 Financial Mistakes to Avoid When Starting a New Business
Starting your own business is one of the most exciting things you can do, but if you don’t do it correctly it can quickly end in disaster. There are many things you’ll need to keep in mind as you plan, including the all-important financial aspects of running your new business.
In this blog post, I’d like to talk about the 3 biggest mistakes first-time entrepreneurs make with their finances when starting a business.
1. Mixing Personal and Business Funds
One of the first things you should do when planning a new business startup is to open a bank account for the business. Mixing your personal finances with those of the business can cause serious problems in many areas. Here are just some of the ways this practice could harm you.
· It will make it more difficult to pay your taxes. If you make business purchases out of your personal income, it will be impossible to show those expenses as business obligations when filing income tax or sitting through an audit. You’ll need a detailed record of all your business expenses because you will itemize them on your business tax return.
· It could cause you to lose your house. If you use your personal home as a guarantee against a business loan and your business fails, the creditor can take your home to pay the debt. The same is true for using personal credit cards and signature loans to finance your business—if your business fails you will be personally liable for the debts. Never put up personal assets to cover business expenses or loans, otherwise a failed business could also mean the loss of your personal assets. Instead, take out loans or credit cards in the business’ name and keep your personal finances separate.
2. Becoming Too Over Confidant
There is a critical moment in every new business owner’s life: when the business first begins turning a profit and the cash flow is healthy. It’s at this juncture when many new entrepreneurs breathe a sigh of relief—and then they start spending money.
But here’s the thing, just because a business does well initially, that doesn’t mean it can sustain the success. And every business, no matter how well it’s doing, needs to maintain a heathy cash flow.
So when these new entrepreneurs start spending because they think they’ve got it in the bag, they’re really undermining any chance of success they have for a profitable business. As the old cliché goes: You can’t make money without money, and that cash flow is the gold that can turn a new business into a profitable one.
Instead, new business owners should only spend what’s necessary to keep the business going until it’s established and has proven itself as solid.
3. Not Having a Business Emergency Fund
Finally, a lot of new businesses fail because they don’t have enough money, and an unexpected emergency can really put a stop to a blooming business. Here’s the one thing you can absolutely count on when you start a new business: things are going to go wrong.
If you know anything about personal finance, you know that an emergency fund is one of the foundational blocks to a healthy financial future. The same holds true for your small business.
Most experts will tell you that you need at least 6 months of expenses in the bank when you start a business, but I go further than that. I also believe that you need a business emergency fund. If you don’t have one, your cash flow could get unexpectedly depleted because of an emergency, and that could easily bring down your business.
For example, if you run a plumbing business out of your home and your truck is hit by an 18 wheeler and totaled, how are you going to keep working? Sure you could finance another truck, but was that expense figured into your budget and calculations? Probably not.
But if you have a business emergency fund, you may be able to buy a used truck that will suffice until your business brings in enough money to purchase another new one. The amount you need to start with varies depending on your type of business, but I believe the very minimum you should plan on is $3,000.
These are just some of the financial mistakes newbie entrepreneurs make—and most of them can lead to a business failure. When starting a business, it’s important that you plan well and outsmart any potential business killing events that come your way.
Do you have any questions about the financial aspects of your new business? If so, leave me a comment below and I’ll do my best to answer it quickly.