Don't Make These Financial Mistakes When You Start a Business

Larry Alton

September 25, 2018

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People often retail the rumor that 90% of startups fail. This high percentage is vastly exaggerated since 40% of businesses make it beyond their first five years.

But the risks of failure are inarguably substantial if you aren't careful. Finances are a major pitfall for many small-business owners, so you'll want to know the mistakes that could shut you down.

Here are a few errors to watch for.

Using a Faulty Invoice Process

You won't get far with a rudimentary, disorganized invoice process. Spreadsheets are useful when you're starting out, but eventually (and all too soon if your operation takes off), you'll need something more robust to track expenses.

"Your invoice isn't just another business document or a flashy way of showing you're the real deal. At the end of the day, your invoice is your ticket to getting paid," FreshBooks, a popular invoicing service among businesses of all sizes, explains.

"So, if [your invoice] reaps such great rewards, why do many business owners face the common struggle of unpaid, lost, or ignored invoices? You may be missing one of the key components that tie things all together."

Invest in good invoicing software to keep your processes organized and your payments rolling. You'll get paid twice as fast and may achieve seamless processing.

Not Planning for Taxes

You'll owe taxes every year—even if you didn't plan on them. Unfortunately, if you haven't been making quarterly payments throughout the preceding 12 months, you'll owe the IRS a fat check in April.

Hire an accountant—whether on a part-time or consulting basis. Let an expert walk you through the tax process, teach you how to navigate the confusing world of business taxes, and keep track of your expenses.

A financial consultant can also help you itemize deductions and identify the best tax breaks at the end of the year. If you approach taxes proactively, you're more likely to save more than you have to pay.

Failing to Save Money

You probably saved for a while to start your business, but when your initial savings are gone, do you have a backup of cash reserves to get you through a lean period? Many new firms don't.

"Beyond simply meeting monthly obligations, it is a good idea to have a safety net—a cash reserve that you keep to help you through lean times," Dough White of Entrepreneur advises.

"Suppose a big customer doesn't pay your invoice or sales decline significantly. Such events are common, and a sufficient reserve will help you weather the storm long enough to make appropriate adjustments to your business."

Plan to keep several thousand in savings. Often, it's better to take out a business loan when you launch your business than to deplete your savings completely. Liquid cash comes in handy when the going gets tough.

Purchasing Inadequate Insurance

Disaster can strike a company when it's least expected, so insurance is designed to protect you from the financial repercussions in those cases. It's tempting to take out the minimum coverage just to meet the requirements of your lender.

But if an accident occurs on your property—a natural disaster or a general economic downturn—your coverage will come up short. A solid insurance policy is essential to protect both you and your employees. A policy will save you from lawsuits, bills you can't pay, and a potential shutdown.

Not Separating Business & Personal Accounts

Your name and your business name should be on separate legal documents. "Mixing your personal and business funds is a big no-no," an article from the blog Clever Girl Finance says.

"For one thing, it's a tax time nightmare in terms of making business deductions based on your business profit or loss. Outside of the tax problem, it's just bad practice because you have no way of knowing how much your business is making or losing, which means you have no idea how your business is doing financially."

Your credit score, personal assets, family, and personal finances could all be at risk if you don't take the time to separate the two entities.

Making Large Purchases Too Soon

As soon as you're profitable, it's tempting to throw the surplus back into your company in a big way. Granted, you have to spend money to make money, but be wary of overdoing it.

Ryan Robinson of The Balance warns:

"Some expenses, like building a website or attending an industry trade show, will be mandatory depending upon the type of business you're starting, but you always need to ask yourself if the expense in question is going to help you generate more revenue in the short-term."

"Other expenses like luxurious parties, team-building trips, and frivolous electronics that aren't essential to the growth of your company offer very little value to your bottom line."

Finances can be stressful if you don't manage them properly. Organize your company finances and protect yourself from the pitfalls. You can succeed if you're smart with what you have.

Larry is an independent business consultant specializing in tech, social media trends, business, and entrepreneurship. Follow him on Twitter and LinkedIn.

Opinions expressed by the author are not necessarily those of WITI.

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