About 30% of new businesses fail within the first two years. But most of the reasons why small businesses fail are completely avoidable if you know what to look for.
Here, learn some of the mistakes many entrepreneurs make with regards to finances...so that you can avoid them.
Not Budgeting Enough from the Start
It’s simple mathematics, and yet 29% of the businesses that fail do so because they run out of cash. When creating your new business budget, make sure to pad it a little for eventualities. You might want to run lean and therefore create a tight budget, but it’s better to increase it and have more than you need than not enough.
Also don’t overlook a really important component of your budget: your salary. Many first-time entrepreneurs think it’s better to forego paying themselves so they have enough for other expenses, and while that may work for a while, you will need some income within a few months. Budget it from the start and pay yourself!
Keeping Personal and Business Accounts Together
Another financial mistake is thinking it’s okay to use your personal checking account for business expenses. Doing so may seem simple at first, but over time it complicates things. It makes it difficult to separate out which expenses are which, and you need to know your business expenses so you can properly file your taxes.
Also, should you ever be audited by the IRS, having your expenses combined will create a logistical nightmare.
It’s better to open a business checking account (and savings too) so that all your business expenses are in one single account. Check out this blog post for more in-depth information about business credit cards: Six Benefits of a Business Credit Card
Not Having a Financing Strategy
If you are able to bootstrap your business from the start, kudos. But many entrepreneurs find that they need financing of one kind or another to either launch or grow the business down the road.
A business credit card can help you build credit...but make sure you pay off any balance each month so you don’t accrue interest.
An SBA loan can also be helpful, particularly if you need to buy equipment, expand operations, or hire staff. But it’s important to have a plan for how you’ll pay it back rather than flying by the seat of your pants. It’s not wise to take out a loan when your business is struggling, and it’s better to have access to cash when business is good so that you know you can always make your monthly loan payment.
The important thing is knowing how much money you need and what you will do with it to grow your business.
Not Putting Money Back into Your Business
As your business develops, you may be tempted to take more of the profit for yourself, but realize that doing so jeopardizes the future of the company. While you certainly should take some profit, you’re better off reinvesting some of it back into the business.
What could you do with a little extra cash? Maybe increase your marketing budget, buy much-needed computers or equipment, or hire help. Each of these things will, over time, help you realize even more profit!
Trying to Manage Your Finances Yourself
While hiring an accountant may seem like an extravagance early in your business, it can, in the long run, be a big help. Filing your own taxes is tedious and takes you away from focusing on your business. An accountant is knowledgeable of all tax laws and may identify certain tax deductions you wouldn’t have known about.
You can hire an accountant just to do your taxes or to help with a few tasks each month without paying for a full-time employee. Here’s a blog post with tips to help you find the right financial professional for your business: How to Hire an Accountant for Your Small Business
Succeeding as a small business owner simply requires paying a little attention to how you manage your money and having a strategy for future growth.