Accounting & Finance
Financial Mistakes You Don’t Want to Make Your First Year in Business
According to the Small Business Association, more than half of all businesses fail within five years of establishment. The most common reason for this is financing.
Money is what keeps a company afloat. When a business has enough capital, it can afford the costs of running a business. However, when a company mismanages those funds, the ability to successfully run the business becomes next to impossible. So, if you’re thinking of starting a business soon, or have recently started a business, these six mistakes listed below should be avoided at all costs.
Underestimating Startup Costs
No matter what kind of business you intend to run, you will require some cash to get things up and running. Unfortunately, most entrepreneurs looking to start a business underestimate costs or overlook important expenses involved in running a business. Essentially, they dive into the business with the little cash they have saved up and quickly run out.
To avoid this, it is critical to review all the costs of starting your business. Then do some online research to find the best rates on common business expenses. Keep in mind you’ll need to foot the bill on your own until you start generating revenue. If you need additional funding, taking out a small business loan is an option.
Not Keeping the Books
The best picture of where your business has been and where it’s going is the company finances. By keeping accurate track of your company funds, you can determine how successful you are, and more importantly, remain out of debt. Unfortunately, however, some new business owners fail to establish a bookkeeping system early on and haphazardly manage their funds. Not only does this not allow them to properly manage the money, but it also leaves them vulnerable to harsh penalties from the government.
To avoid this mistake, it is ideal to set up a bookkeeping system before you ever make your first dollar. First, establish which platforms you’ll use to record your finances and generate reports as you need them.
Also, consider investing in outside help for getting set up and even filing your taxes during your first year in business. A third-party service that offers business tax services would be ideal. Even if you don’t hire them full time, they can ensure that you’re on target your first year.
Not Protecting Personal Assets
Most new business owners aren’t aware that until they’ve clearly separated the two – their company and their personal finances are one and the same. Without a clearly established business entity and separate accounts, should something go wrong with your brand, it could also go terribly wrong for your personal finances. For example, one lawsuit from a dissatisfied customer could leave you bankrupt and without a business.
You can avoid this mistake easily and affordably by first separating your personal and business finances. Next, you should invest in liability business insurance. Such insurance protects your personal finances if your company gets sued.
Mismanaging Accounts Receivable
Giving clients time to pay their invoices is a common tactic new business owners use to attract new business and keep existing clients happy. The only problem is, this ends up backfiring on the business. Clients become delinquent with payments, and essentially, this ties up cash that is necessary to run the business. In this instance, owners are left with few choices like taking out a loan or working with a factoring company, but each option puts them further in debt.
You can’t control every customer you have, but you can establish clear and strict invoice policies early on. Though you want to help your clients out by giving them time to pay, too much time can result in no payment at all. Start by sending out invoices timely and imprinting all necessary information.
Make sure that you have clearly outlined how to pay the bill and provided them with various methods, including online, by phone, or through the mail. You might even provide discounts to those who pay early or on time to encourage timely payments.
There is no doubt that your first year of business will be a transitional one. It may have a lot of trial and error along the way.
However, if you want to ensure that you’re among the percentage of businesses that excels five years and beyond, you’ll need to make sure that you’re managing your finances properly. If you’re making any of these mistakes, it’s time to use the solutions listed to dig yourself out of the hole before things get worse. With proper financial practices, your business’s success has no boundaries.