Running a private business definitely brings many benefits to the owner. It gives you the opportunity to make your own money, develop an idea you believe in and be independent.
However, it also means you personally need to take care of all of the aspects of your business. Your finances may be the greatest challenge you will have to face. Not knowing how to manage them will result in a business that’s unable to thrive and bring profit.
There are many finance traps entrepreneurs are unaware of. Once you identify them, it will be easier to deal with them successfully.
1. No clear boundary between personal and business funds
A young startup owners’ common mistake is thinking that differentiating between personal and business expenses is not that important. Which is a big mistake! If you want to have everything in order, separate your finances. Otherwise, you won’t be able to pinpoint just how much money you spend on different aspects of your business. It’s necessary to monitor your cash flow regularly and to understand how and why every dollar was spent.
Additionally, not differentiating between personal and business expenses could also cause you legal problems. Filling taxes could be very problematic if you don’t know where some expenses originated from.
2. Think twice before hiring
In the beginning, you need to form a small team of reliable and competent professionals. It will ensure that your business goes upward. Of course, it is a lot easier to say it than to actually do it. Many companies, even the big and experienced ones, make a mistake of hiring the wrong person sometimes. Unfortunately, you, as a new entrepreneur, can’t afford yourself to make the wrong choice. You need to devote your time to find the right person for every position. Only then will you succeed in forming a small team of talented people who can make their contribution to your developing business.
This also means that you can’t get sentimental if you notice that an employee is not up to the challenge. If they are not contributing the business, you need to let them go. Otherwise, it will damage your business. Also, don’t go too far with the number of employees in the beginning. Put quality before quantity.
3. Not having sufficient cash reserves
The cost of a startup will probably be low. However, the initial stages of business will probably lead to negative cash flow. Until this period finishes, you need to make sure you’ll be able to manage your expenses and obligations successfully. This means you need to have sufficient cash reserves that will help you make it through.
4. Borrowing money
As a small business owner, you should tread lightly when it comes to going into debt and borrowing money. Credit card purchases or leasing equipment create a form of debt, too. You need to create a clear line between affordable debt and going too far with it. Otherwise, you won’t be able to catch up with all of the debts you have put yourself into.
If you ever consider taking a loan, the necessary thing is to create a clear repayment plan. Don’t go for a large loan that you won’t be able to repay – it will be detrimental to your finances. Leasing things would be a better solution for you in some cases. For instance, if you need electronic equipment, maybe it would be easier to lease it than to get a loan.
5. Not sticking to the business plan
Being a young entrepreneur also means that you will feel very enthusiastic about your business. You will have tons of ideas and sometimes you will feel the urge to derail from the original plan. The fact that you have large funds available at the beginning could deceive you. You could be tricked into thinking that you can afford yourself redecorating your working space or purchase something that wasn’t in the original plan.
It’s safer to keep your eyes on the business plan you’ve created before enthusiasm got control over you. Every dollar you spend needs to be beneficial to the business and not just used in the spur of the moment. Ten dollars spent there and fifteen dollars spent here on things like magazine subscriptions or additional TV services may not look like a big deal. But on a monthly basis, they will make a huge impact on your funds. Control yourself and be thrifty in the early stages.
6. Irregular revision of finances
Be honest – how often do you check your bank account in order to see your expenses? Do you often find yourself surprised by how much money you spent on trivial things? The chances are that you will spend a significant amount of money on items like clothing or jewelry or services like eating out or visiting a hairdresser too often. It’s not just you – it’s what most of us do. We all have experienced that feeling of realizing we spent beyond our means at least once in our lives. The thing is that you can’t afford to be surprised like that if you have a startup business. This would mean you need to make yourself check your bank account regularly (at least once a week) to keep yourself in check. If you avoid doing it, it would only mean you’ll get deeper into debt. An additional benefit from this is that you will be able to identify fraud if it happens. As well as that, you’ll be able to see if every transaction is correct if you also keep notes of every expense.
7. Waiting till the last moment for deductions
There are definitely some expenses that you can deduct when the time for taxes comes. Things like mileage and expenses necessary for the business to run properly are the ones that are deductible. The trick here is to regularly keep track of them and not wait the tax month to come before you start doing it. If you wait for almost a year to make a list of your deductibles, you will definitely forget some of them. And that will result in damages to your income in the end. So, better be consistent and note down every expense the minute it is made.
8. Sticking to just one bank account
Maybe you think it’s simpler to have one bank account where you deposit all your earnings and which you use to pay the bills and every other necessity. However, there are a few reasons why that is a bad idea. First of all, it won’t enable you to save more money. If you have several accounts for different purposes, it will be easier to put money into each one of them every month for a different reason. Furthermore, starting a business means you need to differentiate your personal and business earnings and expenses (as already stated). It will give you better control of the income and outcome and it will be better for IRS audits. Additionally, it will make easier for you to keep a record of the deductibles.
Mindset mistakes to avoid
Along with the financial traps stated above, there are specific types of a mindset that cause you to make certain financial mistakes. These detrimental forms of mindset will also have a negative effect on your finances. It’s best if you know how to identify them in order to change them.
Having fear of failure
Once you have managed to save up a significant amount of money, the question is how to use it. One of the possibilities is to invest the money and earn on compound interest. However, the fear of losing that hard-saved money is usually stronger. The risk that comes with investing money into something is real, and so is the fear. Even though the risks cannot be completely eliminated, there are many professionals who can help you minimize them. Furthermore, in the case where the owner’s financial circumstances have changed so much that they start thinking about liquidation, companies like Dean-Willcocks Advisory also give useful input into the process. In other words, if you know which professional you can turn to for every situation and every aspect of a job, no need to avoid smart risks.
Hoping to get rich
As long as you keep on waiting for certain circumstances to change in order to start a business, you will probably never do it. If you’re hoping for a higher salary or an inheritance to finally start something on your own – you may have to wait a lifetime for that.
The truth is – you probably already have appropriate conditions to do it. You can always choose to stick to a budget, create a smart, well-thought plan and work on achieving the most important goals. That way, the only person who can make a difference is you.
Inertia can damage you financially
Each one of us has their own comfort zone. That’s when inertia can prevent you from saving money. More precisely, you can spend more on paying bills and buying food due to inertia. It could also be the culprit for not grouping all your savings in a single fund to reduce fees. Or it can stop you from switching to a better mortgage just because you’ve been using the same one for years. So, what you can do is get a professional financial coach to advise you on where you should make changes in order to save more.
The lifestyle inflation issue
This is a trap you may not be aware of at all. It is a state you find yourself in when you start earning more. The more you earn, the more you feel you need to spend. For example, when you buy something cool and new, you’ll start comparing it with the things you already have. And then, they will magically start looking shabby or old-fashioned. Which would mean you need to buy more new clothes to replace them. And that’s how you find yourself as a victim of the Diderot effect.
Another important with lifestyle inflation is that it masks your future issues. Even if you’re earning a lot thanks to your current business, it won’t last forever. More precisely, you will have to retire at some point. And then comes the trouble – your life standard will have to decrease significantly if you haven’t planned for it decades in advance. If you see that you’re not able to save money even if you’re earning more than before, you need to stop and think. You won’t have a pleasant retirement at all if you don’t teach yourself to save and plan your budget carefully.
Being too casual about money won’t work
Maybe you’re that type of person that everybody finds generous and easy-going. It’s what they like about you. You may be the first one to open your wallet to pay the bill or the one who always gives the coolest, most expensive presents. And you’re probably the one who thinks that your finances will manage on their own. Well, you need to take care of your current money to secure your future. Maybe you know some people who make it look so easy to spend money but they have probably done a lot to make sure their finances are solid. Follow their example – pick the times when to be generous, so that you have enough to cover your everyday expenses.
As you can see, things you do at the beginning stages of your private business will have a strong effect on your company’s success. By making sure you take all the smart steps and avoid financial mistakes, you will minimize the risks to the greatest extent possible. If you also pay attention to your mindset before and after you start a business, you will definitely pave your way to success.
Travel guide for the perfect business trip in Sydney
Benefits of Using Performance Review Software
Top 5 Green Industries in 2019
Entrepreneurs4 weeks ago
Build A Successful Marketing Business With Omon Babanov
Marketing3 weeks ago
12 Smart Ways to Promote Your Podcast
Innovation4 weeks ago
Why Innovation Value Is Lost During Project Development
Entrepreneurs3 weeks ago
Thinking About Skipping College to Start a Business?
Marketing3 weeks ago
Should You Automate Your LinkedIn Outreach Messages in 2019?
Women@KD3 weeks ago
Using Music to Spread Inspiration – Independent Pop Artist, Hitha
Women@KD4 weeks ago
A minute with Kourtney Whitehead and Her Passion
Marketing4 weeks ago
7 Digital Marketing Hacks for Healthcare Businesses