If you want to be a successful entrepreneur, here are a few financial mistakes you must avoid this year.
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Cash is the lifeblood of any business, big or small, new or old. As an entrepreneur, if you want your business to grow and thrive in 2022, you have to manage your funds wisely.
If you are not careful and make costly financial mistakes, your business may be crippled before you even realize it. Money management issues and cash flow can lead to business failure. If you want to be a successful entrepreneur, here are a few financial mistakes you must avoid this year.
1. Starting a Company Without a Business Plan
When you are launching a new business, the first thing you need is a business loan. And to qualify for a business loan, you need two things: a good credit score and a business plan. Banks and financial institutions want to know how much it costs to run your firm and what you plan to do with the money. If you apply for a loan without a proper business plan, there is a high chance your application will be rejected.
Other than that, a business plan helps you determine your financial needs and allocate funds where it is necessary. Launching a business without a plan is a fatal mistake. You must avoid it by any means.
2. Failure to Keep Track of Your Expenditures
When your business is new, your expenses are likely to outweigh your revenue. A business loan can help you cover your startup costs. But that doesn’t mean you should waste money. If you do so, you will exhaust your funds soon. Applying for multiple loans won’t help either, and you will only increase your debt burden.
Monitor your financial statements at regular intervals to track your expenses. It will help you understand if your business is making steady progress or not. Set up a budget to avoid spending more than you need to, and make sure to pay all the bills on time.
If you are not good at tracking your income and expenses, hire an accountant as soon as you can.
3. Buying Things That Won’t Help to Generate Business Revenue
Whether your business is new or old, you need many things to increase your revenue, such as websites, offices, software, talented employees, etc. However, if you are planning to make large investments, think carefully. Do you really need to make those investments? Will those investments help to boost your business revenue? Expensive team parties and trips are a few expenses you don’t need to make this year, especially when the world is still battling with omicron.
4. Incorrect Pricing
Decide on a fair price for your goods or services. Conduct a market survey to know how much your competitors charge for similar products and services. Don’t set too high a price, as your customers will run away; don’t set too low a price, as you will incur loss.
5. Not Receiving Payments From Your Customers on Time
Not getting paid on time can lead to serious cash flow problems, and you may run out of money soon.
Prepare a written payment agreement, and ask your customers to sign it. Mention the payment details, including the deadline, on the document. Make sure your customers understand it to avoid problems in the future.
Maintain a payment schedule, and send your invoices accordingly. For instance, you can send your invoices within the first 15 days of each month. Send reminders to customers when the deadlines are approaching. For example, “payment due within 15 days.”
6. Not Maintaining Separate Personal and Business Bank Accounts
The cardinal rule is to separate business and personal bank accounts. If you maintain the same bank account for your business and personal expenses, it will be challenging to separate the two later. Moreover, if you have business debt and your lender levies your bank account after winning a judgment, you are in big trouble. The lender will take all the money from your bank account. They won’t even care if it is your personal fund.
7. Taking on Personal Debt
Any new startup is bound to face a few setbacks. That’s normal. There are so many unknown variables to learn, especially in the first year of your business. You’re in an uncharted area, and it’s easy to make mistakes. But the problem is mistakes come with a price tag. You have to pay a heavy price for rectifying those mistakes.
Moreover, you may need money for business expansion. For this, you need to set aside money for those expenses by leading a frugal life. If you take on personal debt now, that will be a huge mistake. For instance, if you take out a payday loan to fulfill your short-term financial obligations, you will be in trouble later. First, the high-interest rate of the loan will eat up all your savings. Hence you won’t have any money to repay your payday loan and cover your business expenses. The only option is to find an affordable payday loan debt solution and get rid of that debt as soon as possible.
Avoid personal debts as much as you can. It will be very difficult to cover your emergency business expenses if you have personal debt.
8. Not Understanding Business Tax Implications
Business tax is a major expense of entrepreneurs. As an entrepreneur, you have to pay state and federal taxes based on your business location, structure, and many other things. Wrong tax calculation or failure to pay business tax can cost you a lot of money. The IRS will issue a massive tax bill, and you will have to pay it.
Don’t make this mistake. If you don’t understand business tax, consult a tax advisor. The tax advisor can help you understand your tax obligation and can help you make the required payments on time. A good tax advisor can also help you find the areas where you can save tax.
Financial mistakes can derail your business. According to the U.S. Bureau of Labor Statistics, around 20 percent of startup companies collapse without even completing two years in their industry. Therefore, it’s imperative to avoid costly money mistakes while building your business. Discuss with your team before making crucial decisions, and get the help you need to avoid problems in the future.
Lyle Solomon is a principal attorney for the Oak View Law Group in California, where he specializes in consumer finance. He has also written several articles on financial well-being. Connect with him on LinkedIn, or tweet him at @lyle_solomon.