The business world is fraught with uncertainty. You’ll have times when you’re on top and times when you’re trying to keep afloat. One thing is certain: everyone makes errors, but only those who learn from them prosper. Thus, the following are a few common errors that most business owners commit.
1. Failure to separate business and personal accounts
The first and most common error small business owners make is failing to maintain separate accounts for business and personal finances. If you believe you are being prudent by doing so, you will soon witness the consequences. Before you begin receiving money from paying customers, disregard the convenience of a single account and establish separate savings, credit cards, and checking accounts from your personal one.
It simplifies the process of punching your business’s numbers and planning for the unexpected. You can carefully manage your expenses and even ensure that everything is in order when it comes time to pay taxes. This is achievable because there is no overlap between your personal spending and earnings and the revenue generated by the business. Consider relying on your memory and going through your debits and credits when all of your finances are in one account. This is a sure-fire recipe for tragedy.
If you’re not careful, it’s also quite easy to go afoul of the IRS for the improper personal use of corporate cash. Avoid falling for this trap and instead safeguard your financial future by opening separate accounts. Then use your personal account only for personal purchases and your company accounts exclusively for business transactions. You’ll reap the advantages afterward. Additionally, use caution while writing a personal financial guarantee.
This is something you should never consent to. You split your accounts to protect your personal assets, and signing such a guarantee binds you personally to the debt. While it is OK to risk your time and money when conducting business, you should never endanger your personal assets or well-being. Never should your business rob you of your life and abandon you.
2. Immediate execution of large business purchases
It’s normal to desire the best for your business when you first begin operations. New computers, a fancy workplace, and personnel who inspire envy among your competitors. However, before making any purchases, take a step back and consider your options.
While certain expenses are non-negotiable based on the type of business you’re establishing, you should consider whether the expense in issue will help you generate more money in the short run. At first, learn to live on the barest necessities and progress from there.
Reduce your excitement slightly and avoid allowing your adrenaline to make critical decisions. Taking giant moves may result in missteps, resulting in a dramatic decline in productivity, sales, and brand recognition. Prior to spending money on things that would be wonderful to have, focus on growing your business.
If you are not careful, moving too quickly could result in bankruptcy. Therefore, take the time to develop a well-defined strategy for expansion that avoids jeopardizing everything you’ve worked so hard to achieve.
3. Making significant individual purchases
While you may maintain a separate business and personal account, circumstances may need you to dip into your personal funds to support a business necessity. While some may argue that business and personal matters should not be mixed, when the chance to grow your business presents itself, it becomes worthwhile.
Perhaps you have an opportunity to grow into a new market or have devised a marketing plan that has the potential to generate significant revenue. Throughout the first year of operation, numerous unexpected and unforeseen challenges may occur. You’re going to run into a few speed bumps. You’re going to fail, and it’s going to cost you a lot of money.
If you make a hasty purchase of a car, a house, or any other personal item and anything unforeseen happens with the business, you may find yourself unable to pay yourself the next month. Keep your business and personal lives as lean as possible, especially in the early phases while you’re still attempting to expand your firm.
4. Accumulating credit card debt in the hope of generating revenue in the future
According to experts, irresponsible credit card use is the most common financial blunder committed by businesses. While utilizing credit cards is a common business activity, it also exposes you to debt that may result from poor credit management. Due to the convenience of credit cards, many business owners are blind to the fact that they are compounding their spending and incurring interest charges each time they use their credit card and do not pay off the debt in full at the end of the month.
If convenience is what you’re looking for, opt for a debit card. It is not difficult for firms to obtain loans; the problem is repaying them all. And it is not just the capital, but also the interest, regardless of their cash flow position. Bear in mind that even if the firm fails, the lender will still expect you to repay the debt. Clearly, overreliance on debt financing reduces a business’s cash flow.
Numerous businesses place collateral in the expectation of obtaining debt financing. And this is frequently financed by personal assets such as homes and automobiles. While taking on debt may seem like a good idea when your business needs additional funding, keep in mind that each loan will appear on your credit report and will have an effect on your credit rating.
The more you borrow, the riskier the lender becomes, and as a result, you wind up paying a high-interest rate. Exercise caution when dealing with debts. Never act rashly and always think things out, as this could severely harm your business.
5. Not setting up funds for emergencies
The goal of an emergency fund is to ensure that monies are available quickly in times of need. You may feel secure in the knowledge that you are covered for property damage, product loss, and equipment repairs and therefore do not require additional backup. However, given the length of time required to process such claims, you’d be wise to reassess your view on keeping an emergency fund.
One reason is that insurance policies do not always cover every eventuality. An emergency fund enables you to maintain operations and instantly begin repairing and replacing any damaged or stolen assets or products. According to statistics, more than 80% of firms fail due to a lack of cash flow. This is not only about the money flowing in and going out. Additionally, it is a matter of liquidity and timing.
Having cash on hand may be what keeps the firm afloat and prevents you from incurring debt in the event of an emergency. Having cash on hand also enables you to strategically develop your firm and introduce a new product line. You have the ability to seize market opportunities by acquiring a competitor or purchasing excess goods at bargain pricing.
Numerous financial gurus will tell you that you need an emergency fund to address unforeseen financial events such as house repairs, medical expenditures, or job loss. Likewise, one may say the same thing about your firm. Businesses face unforeseen obstacles, and while loans may assist you in these cases, they are not always the greatest solution for your firm.
6. Taking no action to prepare for upcoming tax obligations
Different types of businesses are subject to varying state and federal tax obligations, which enable the government to finance critical infrastructure and programs benefiting citizens. Employers typically provide forms to employees each year to file income taxes.
However, as a self-employed individual, you are responsible for taking the initiative and meeting all of your tax obligations throughout the year. As a self-employed individual or corporation, you must make estimated quarterly payments to the IRS to avoid being hit with a large tax bill when the time comes. Calculating this precisely requires time and effort, so plan accordingly, as this is all a part of being a business owner.
While it may appear straightforward, it requires considerable thought. Consult your accountant and take the necessary steps. You may lose money in the first year, which is common for new businesses, but filing quarterly tax reports demonstrates that you owe nothing. Avoid unnecessary trouble by getting your taxes in order as soon as possible.
7. Failure to establish a clear budget for your business
As a business owner, it is your responsibility to guide your startup toward profitability, which can only be accomplished with a well-planned budget for marketing, operations, and other expenses. Without a firm grasp on the revenue you’ll generate and the costs associated with obtaining it, you’re almost certain to fail.
You could be said to be flying blind. A well-defined strategy is critical to your business’s profitability. Your estimate may be close to zero, but with a budget, you’ll at least know how long it will take to start generating revenue. Establish budgets for each stage of your business, but especially for the first year.
You could have one a month prior to the grand opening, another following the launch of your next product, and so forth. Depending on the circumstances, you could alter whatever occurs in between. If you’re new to the game, there are several industry associations that can assist you in estimating expenses and even probable revenue. Do not immediately reject them, as they may assist you in planning for your business’s growth.
8. Refusing to make professional services investments
Business owners take on numerous roles, and it all becomes a little too demanding at times. There is only so much you can do. While the world of business requires individuals who can wear multiple hats, there are times when the business suffers when individual attempts to do everything on their own.
Numerous new business owners make this error by refusing to delegate responsibility. It is critical for your business’s success and personal well-being to have employees who can contribute to the business’s growth. It does not have to be a solo performance. As a business owner, it is up to you to assess your strengths and weaknesses and, where necessary, hire someone who is, allowing you to concentrate your efforts on areas where you can add the most value.
Never forget how valuable your time is. While you may save money by doing a lot of things on your own, this does not always imply that you are making the best financial decision.
In conclusion, while you will not always make the correct choice, there are some common errors that can be avoided from the start. Hopefully, you’ll heed this advice and build a very successful and profitable business as a result. We appreciate your attention, gentlemen. Have a wonderful day, and I’ll see you all tomorrow.
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