Running your own business can be very rewarding. You have more freedom to work on your ideas, you enjoy a better lifestyle, you are in control of your time and schedule, and you earn more money… At least that is how it is supposed to be.
However, without a proper financial management strategy, all these dreams can turn to frustrations. There are many financial mistakes to avoid if your business is to achieve its vision and potential, and to give you a helping hand, 5 of the most common of these are highlighted below.
1. Not Having Sufficient Operating Capital
You’ve done your research on the costs of starting your business. You raised the necessary funds and successfully launched your business. However, if you do not have enough cash flow or working capital to sustain you till you start earning revenue, then you’ll likely get stuck or even become insolvent along the way.
Your working capital is the difference between your current assets and current liabilities. It measures your business’ short term financial health. When your current assets are more than your current liabilities, then your business is in a better position to pay creditors.
A negative or declining working capital over a prolonged period may signal decreasing sales volumes or increased expenditure which may lead to losses and bankruptcy.
The working capital ratio (current assets/current liabilities) is also an indicator of the business’ operational efficiency. A ratio below 1 indicates declining working capital while above 2 indicates lack of investment of excess assets. Ideally, the business should strive for a ratio between 1.2 and 2.0.
2. Mixing Personal and Business Finances
Your business is borne of your ideas and driven by your financial investments. Thus, it is tempting to treat the business and the individual as one entity. This is a grave yet common mistake.
You need to keep your personal finances and business finances separate. This makes it easier to budget, do your bookkeeping and accounting, and determine business profits and losses.
Remember, your business creditors and lenders will need to assess how your business is performing. This will require separate banks and income statements. Lenders may not take your business seriously if you treat your finances like a hobby.
Additionally, when you mix the finances, it’s difficult to determine what is a legitimate business expenditure and what is a personal expense. This will complicate your tax filing when it comes time to determine deductions. Mixing finances will also invite an IRS audit, and who wants that?
3. Not Having a Financial Mentor
Every CEO and entrepreneur needs someone they can talk to about the ups and downs of business. Someone who will not only offer an ear, but will follow up with actionable and qualified advice.
Avoid the financial mistake “flying solo” can create, by investing in mentorship and professional coaching programs such as the Titanium Success Method, which will help you focus on what’s important, while making sound decisions on areas that you lack expertise.
A good coach will help the entrepreneur look at issues critically and gain clarity. For instance, you might know how to do your bookkeeping, good at project management, and have a magnificent marketing plan to drive your sales yet still make a loss. A good business mentor will help you tie all these skills and functions together to develop one seamless operation.
Most new entrepreneurs make the mistake of thinking they need lots of money to engage a good mentor. On the contrary, the best mentors assess your potential and the value of your human capital, then work with you at all stages of the business.
4. Neglecting Personal Credit
Your business may take up all your personal finances, focus, and attention when starting out. However, a financial mistake to avoid is neglecting your personal finances. Lenders will be looking at your personal finances to determine whether you will responsibly handle any business finances, loans, and investments.
Always make timely payments on your credit cards, student loans, mortgage payments, and car loans. Additionally, keep your personal debts low, relative to your credit limits. Keep in mind that your on-time repayments make up 35% of your personal credit score while your credit utilization accounts for 30% of your credit score.
Check out your credit score for free once a year from the leading credit score companies. The leading 3 are TransUnion, Experian, and Equifax.
5. Not Automating Processes
When you are starting off your new business, you’re probably handling the sales, accounting, and all other facets. And it’s possible that the only help you have is your spouse assisting with bookkeeping and your son handling deliveries.
No matter the size of your business, create automated systems early on. This will help you track spreadsheets, payroll, expenses, and invoices from the time you are a one-man operation and as you grow.
The top 3 financial systems you need to automate are your invoice and expense tracking, time tracking, and payroll.
Financial Mistakes to Avoid – Beware the Trap
Operating your own new business can be a formidable task, but only if you don’t have effective business systems and strategies in place that ensure you are aware of common traps, just like these financial mistakes to avoid. There’s no need to go at it alone though, and sometimes it’s a simple matter of finding a successful mentor to model, so that you actively learn from those who have taken their new business to soaring new heights.
Which financial mistakes do you think new business owners should avoid?