You’ve probably heard all the worrying figures about the proportion of businesses that fail in their first year. There are many different things that can drive a new venture into the ground, from the lack of demand to poor marketing to sudden, unexpected shifts in the economy. However, one of the most prevalent reasons is mismanagement of finances. To make sure you don’t lose your dream to a single blunder, here are some common financial mistakes small business owners need to avoid…
Becoming Dependent on Plastic
A lot of small business owners have to lean on their credit cards to get their ventures off the ground, especially if they’ve rushed through the planning stage. While they can be relatively harmless if they’re used wisely, credit cards are generally something you should try to avoid mixing with your business finances. The high interest rates and annual fees can quickly punch a massive hole in your cash flow. Whether you do it through a business loan, your own funding or a capital infusion, make sure you have sufficient operating capital to avoid going into debt.
Mixing Business and Personal Finances
Depending on the state of your current personal finances, you may be tempted to cross the line, and throw your personal capital into the mix to help your business out of sticky spots. However, it’s extremely important to keep these two things completely separate. This will make budgeting, accounting and reconciling both your business and personal finances so much easier. It can also be a big help when you’re struggling to determine profits and losses for the business. There may be times when mixing your business and personal finances can be a smart move, but these circumstances are extremely rare.
Foregoing Business Insurance
Even though business loans are more accessible now than they have been in the past, starting a business and pushing it towards its long-term goals certainly isn’t easy. Stock, payroll, marketing and tax will eat up a sizable chunk of the capital you have to operate with, and after all that, the very thought of further expenses can be enough to make an entrepreneur’s stomach crawl! Having said that, you need some way to protect your business from unforeseen problems that can spring up, and drive a profitable operation into the ground. Make sure you’re properly insured, and you’ll be able to put these worries to bed!
Not Having a Cash Reserve
We all know that starting a business in the first place takes money, but unless you’re a Zuckerberg or a Branson, you’re not going to be turning a healthy, secure profit right out of the gate. It’s going to take several quarters for a steady profit margin to be achieved, and in that time, all kinds of things can go wrong. Start building an emergency cash reserve for your business now. If you haven’t started your business yet, and it doesn’t look like you’d be able to muster this kind of cash safety net, then plan to save for a while longer.