By their very nature, entrepreneurs are risk-takers, and that’s something to be celebrated. However, many entrepreneurs share a tendency to dive in head first, without stopping to weigh up the risk. Since over 90% of startups fail by the time they hit the decade mark, it’s important to create a strong financial foundation for your business to set yourself up for future success. We’ve compiled a list of the seven biggest money mistakes that startup owners make to prepare you for the journey and keep you on track for financial success.
1. Failing to Separate Business and Personal Accounts
Opening a separate business bank account should be at the top of your list of priorities when starting a new business. It never pays to muddle business and personal accounts, and instead only leads to confusion, headaches and mistakes on your tax return.
Set up separate bank and credit accounts for your business at the very beginning to save yourself hours of picking apart records later on. Keeping a separate business account functions as a basic bookkeeping system. This makes it much easier to understand and analyse your current financial situation, as well as plan for the future.
A separate business bank account also helps to maintain a growth mindset when it comes to your business. Not every penny you earn should go straight in your pocket – it’s important to set aside funds to invest in growth.
2. Flashing the Cash Too Soon
You’re understandably excited about your new business, but don’t get carried away with big purchases. Yes, it would be nice to have premium software, flashy laptops and a beautifully decorated office, but these luxuries are likely to send you way over budget. It can be difficult to balance financial conservatism against a growth mindset, so we recommend creating short term ROI estimates to help you decide which purchases are worth it and which can wait.
3. Maxing Out Your Credit Card
Business growth requires investment, but it’s definitely not a good idea to max out your credit card with the expectation of future income – the old adage “don’t count your chickens” comes to mind here.
Business credit cards are great for smoothing out cash flow issues, payment protection and building a strong credit score but it’s vital that you use them responsibly. Ideally, you should pay off your whole balance each month before you begin to accumulate interest fees. Don’t gamble with credit card debt; it will almost certainly come back to bite you.
4. Large Personal Purchases
Often, new business owners are required to dip into their personal bank accounts to keep their business growing. This is especially true when a business runs into cash flow problems or is entering a period of rapid growth. Therefore, it’s important to keep an eye on your personal spending and refrain from living too extravagantly – that new Mercedes won’t keep your business afloat.
5. Failing to Create a Business Budget
Your business name is one of the most important branding decisions you’ll make. It should be unique and memorable, and accurately reflect your company’s products or services. Be sure to check with the appropriate authorities to make sure it’s available and then register it.
6. Neglecting Accounting and Bookkeeping
Let’s be honest: bookkeeping is no business owner’s favourite task. However, if you neglect your accounts and books now you will be hit with a huge headache when tax season rolls around. It’s best to prepare yourself by taking the little-and-often approach to updating your records and investing in cloud accounting software that will make your life a whole lot easier.
7. Not Creating a Safety Net
The business world is full of risks and it’s important to prepare yourself for times when things don’t go your way. There will be occasions when you need to fork out for emergencies, you run into cash flow issues or market shifts leave your business vulnerable. and when that happens you’ll thank your past self for creating a financial safety net to keep your business afloat. It’s advisable to have a savings account that can cover a minimum of three months’ worth of expenses. Even if you never need to use it, you will sleep better at night knowing that it’s there.
The best way to set your business up for financial success is to plan ahead and make carefully measured decisions. Create a budget and separate your business and personal finances, but be financially conservative in both areas of your life. Take the financial health of your business seriously and don’t defer tasks such as accounting and bookkeeping until later so that problems start to compound. By employing the above strategies, you can make sure that your startup business doesn’t join the ranks of the failed 90%.