When we start out in business we are highly enthusiastic and rush into getting started. I know I did.
Once I’d made the decision, having accepted redundancy, that I was no longer going to work for a corporation – any corporation; I had my business name, a domain name and the business registered with the Companies Office – all within days! We get fancy letterhead, business cards, web designs pronto!
However, we don’t always spend the same amount of time and energy getting the financial side organised. This is especially so of sole traders: eg massage therapists, plumbers, doctors, electricians, psychotherapists, PR consultants. You are all highly skilled professionals but, more often than not, have not had any experience in managing business finances.
These are the three mistakes I most commonly see made in these situations:
1. Commingling funds. Not being clear about which pocket the money is coming from.
- You are in the mall and remember that you need some more paper for the printer in your office. It is on special so you pay cash out of your wallet (personal).
- At the same time you see a beautiful blouse/shirt in just the colour you have been looking for. Sadly, your personal cheque account is overdrawn and there really isn’t room on your personal credit card, but there is on the business credit card so you use that and walk away delighted with your new purchase!
- You have a home office and claim expenses for it on your taxes. The electricity bill comes in and you pay it out of your personal account.
There is not necessarily anything wrong with these decisions so long as you account for them all correctly, in both accounts – personal and business. However, most frequently this doesn’t happen. If you don’t know how much it is costing to operate your business, how can you tell if it is profitable or not?
2. Not being prepared for taxes.
As employees, someone else dealt with your taxes. Your PAYE was taken out of your salary before you got it, you didn’t have to worry about it. Now, as a business owner, you are responsible for paying them. The best way to ensure you don’t get a nasty surprise when you, or your accountant, does your tax return is to have a separate account for taxes and put money into it from each, and every, payment you receive.
The way this most commonly plays out is simply underestimating just how long it will take to get enough customers/clients to make your business support itself let alone you! If you have sufficient funds you can stay in business until this happens; if not you will be forced to go and get a “job” ie where someone else pays you!
Any of these can force you out of business, especially if you leave it too late to get expert help.