6 financial mistakes small businesses and early startups should avoid
Starting a business is hard work. You need to create a viable product or service, find the right customer base, establish an effective marketing strategy, hire the right people, and a lot, lot more. And just ensuring your venture's survival, much less earning profits, is a long and arduous path fraught with pitfalls. With all the traps that line the journey of a business owner, mistakes rarely go unpunished. Even the smallest ones have the habit of causing a disproportionate amount of harm in the long run. Among the several mistakes that the owners of small businesses are susceptible to, financial errors are perhaps the most common and the most harmful. Here are six of the most common financial mistakes that small businesses and early stage startups should know to avoid:
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Mixing personal funds and business funds
This is one of the most common and mistakes small business owners and inexperienced startup founders make. Not maintaining separate bank accounts for business and personal finances can cause of all sorts of financial, and maybe even legal, problems in the not-so-distant future. Tracking expenses and filing taxes, for example, is extremely difficult and very easy to get wrong if you've been making personal purchases using your business' finances or vice versa.
Spending for the sake of it
It's easy to get caught up in the thrill of starting a new business. You're full of optimism, the first few months have seen you generate decent revenue, and there's no shortage of funds at the moment. So you decide to go all out and decorate your office to rival those of the best Silicon Valley startups, replete with a PlayStation, a Foosball table, a fridge stocked with countless Red Bulls, and so on. But this frivolous spending takes a big chunk out of your profits (if they even exist). It's important for small businesses and early stage startups to scrutinise every expenditure to see if it has any real benefit.
Over-hiring
Hiring is something even the best of companies manage to get wrong with alarming frequency. But while they can get away with it (most of the times), small businesses cannot. When you're just starting a venture and haven't yet established a steady revenue stream, hiring too many people can be a death-blow. It's important for burgeoning companies to hire only a small team of talented people who actively contribute to the collective goal and help the business progress. Also, business owners and startup founders should learn to let go of those people whose work isn't up to the standard as early as possible; time, along with money, is something you need to be very protective of.
Not keeping a cash reserve
Just as working individuals are advised to siphon off a percentage of their salary into a savings account, small businesses should maintain a reserve fund in case things get hairy. A revenue stream is anything but steady, and you can never know when it will suddenly run dry. Reserve funds are an essential safety net that can get a business through a particularly rough patch without suffering due to the lack of immediate revenue.
Not maintaining accounts
Every business should keep a detailed record of each expense and transaction, no matter how minute. Small businesses and startups often overlook the importance of bookkeeping but they are invariably reminded of its importance when the taxman comes to collect his dues. Not keeping a track of expenses also results in tax reliefs going unclaimed. Hiring an accountant, or retaining one on a contract, is essential while running a business.
Taking large loans
Enraptured by grand visions of scaling up and a commensurate rise in profit, small businesses often fall prey to the dangerous habit of borrowing more money than they need. It's important to remember that generating a lot of revenue is not the same as receiving steady profits. If you've borrowed large sums of money and your business suddenly starts faltering, you'll be in a lot of debt that can destroy both you and your company. Debt brings with it high-interest payments which places on you a crippling pressure to succeed which in turn causes a potentially harmful amount of stress. If you do have to take a loan (you may not really need it), only borrow as much money as you need for now and do so after coming up with a comprehensive repayment plan.
Running a business requires an almost fanatical attention on its finances. Only if you have a strong handle on things like budgeting, accounting, and financial planning can you secure your business' future and turn it into a profitable venture.