Here are 9 financial mistakes new business owners should avoid. Let’s get started!
There are plenty of reasons to launch your own business. Maybe you’re passionate about a particular product. Maybe you’re eager to serve a specific audience. Or maybe you’re just excited about being your own boss. Of course, small business owners also want to make money. In order to maintain a profitable business, it’s important to steer clear of certain financial potholes. Whether you’re a sole proprietor or run an LLC, there are a number of common financial errors to be aware of.
Common Financial Mishaps (And How to Avoid Them)
Not establishing the right legal structure.
It may not feel glamorous, but one of the most important things a small business owner can do is decide between operating as an LLC, Partnership, or Sole Proprietorship. Choosing the right legal structure comes with many advantages:
- It helps your business appear more professional.
- It makes it easier for your business to secure funding.
- It helps protect your private assets.
Don’t delay in selecting an appropriate legal structure for your small business. If your business is in the Lone Star State, you may also need to consider choosing a registered agent in Texas. Registered agents play an important role within the court and legal systems, and can receive legal mail and other important documents on behalf of your business.
Making too many big purchases.
You’ve probably heard the old saying: You have to spend money to make money. There’s certainly some truth to that. At the launch of a new business, you may need to buy some equipment or product inventory. You’ll likely need to consider investing in personnel. You may even need to buy office space, though remote work makes that increasingly unnecessary.
With that said, it’s important to stick to the essentials, using your business loans or investment capital only on things you truly need. Along the same lines, make sure you avoid using any business funds to make personal purchases. (This is where using an LLC to separate business and personal interests can be helpful.)
Exposing yourself to unnecessary risk.
Any time you start a business, you open yourself up to risk. You risk customers or employees getting hurt while using your product. You risk claims that you misrepresented your services. Any of these risks can entail legal action against your company, and that can be costly.
While risk cannot be totally avoided, it can be mitigated. The best way to mediate your small business risk is to make sure you are fully insured. An experienced small business broker can help you determine the types of coverage you need, such as general liability, errors and omissions, and worker’s compensation.
Mixing your bank accounts.
Another mistake that’s all too common among new business owners is mixing business and personal bank accounts.
When you use a business account to pay for personal expenses or vice versa, there are many potential consequences. These can include business cash flow problems, complications filing your taxes, or difficulty setting clear financial goals.
Again, establishing your business as an LLC and opening a business-specific bank account is highly recommended, but you’ll also need to be cautious about how you use that bank account.
Accruing too much debt.
Sometimes, small business owners have to borrow money in order to address seasonal ebb and flow or to invest in capital improvements. There’s nothing necessarily wrong with taking out a business line of credit, or with using a credit card. In fact, staying up to date with your payments will help you build your business credit.
Just make sure you don’t take on too much debt. Falling behind on repayment will erode your creditworthiness, and potentially leave you with long-term cash flow problems.
Not having a budget.
Often, smaller companies neglect to develop any kind of budget at all. The rationale is pretty simple: They have modest expenses, pay for all of them from the same account, and don’t see any need to have a more sophisticated roadmap in play.
This is a mistake for two reasons. One, it makes it difficult for the company to develop any kind of financial discipline, which may lead to lax spending down the road. And two, it means the company isn’t actively pursuing financial goals. A budget is essential for helping you keep your objectives top of mind, and take steps toward achieving them.
Also read: How to Use Social Media to Improve Your Career and Business
Failing to note broader financial trends.
Small business owners must keep an eye on their company’s finances, but also on the broader economic situation.
Here’s an example. In recent years, the USA has seen record-low interest rates. More recently, the Federal Reserve has taken some actions to raise interest rates. Business owners who don’t pay attention to these trends may miss their window to lock in competitive rates, secure affordable financing.
Similarly, failure to reckon with inflationary rates may mean poor pricing, eroding profit margins, and endangering the company’s finances.
Investing too much in inventory.
Having too much inventory can be a problem in more ways than one. For one thing, it takes up a lot of space! More to the point, surplus inventory costs money. And if something happens to make that inventory unsellable (say, theft, a fire, or a flood), the business could really be in a bad place.
You definitely want to ensure enough produce to keep your customers happy, yet at the same time, it’s important to acknowledge the drawbacks of buying in bulk. This is one reason why print on demand models have become so popular.
Failing to create a contingency fund.
Business owners face a number of regular, predictable expenses. These include things like your rent, payroll, and wi-fi costs. But surprise costs and emergency expenses may also arise. The question is, how will you pay for them?
Sometimes, there is no choice but to take out a business line of credit. But to avoid taking on too much debt, we recommend having an emergency fund stocked away. “Rainy day” money can be a lifesaver when a piece of equipment fails, or you need to make repairs to your facility.
Steer Clear of Financial Errors
It’s all too easy for new businesses to succumb to money problems. Steer clear of these common errors to keep your company in the black.
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