Financial Mistakes To Avoid In Your First Business
After spending months thinking about it, you finally decided to quit your 9-5 job and start your very first business. You think that this will be a win-win situation for you because you get to do what you love and be your own boss. That enthusiasm is a great start, but do you know how to take care of your finances? How you manage your finances can either make or break your business in the long run.
One of the reasons why you’re starting your first business is because you want to earn a profit. This is your very first business, and you want to be very careful with how you spend your money. Aside from keeping track of your expenses in the business, you should also take note of some financial mistakes you should avoid making. These will serve as your financial don’ts when running your very first business:
1. Don’t mix your personal and business finances
While it can be tempting to have one bank account for both business and personal finances, don’t do it. You’ll only end up making personal purchases with your business’ money and vice versa. You won’t know how to assess your business and personal financial health separately. You need to create this psychological line so you’ll know which expenses should be credited from what account, without affecting the other.
2. Don’t immediately make big purchases for the business
You’re excited to open your doors, and you may have been looking into office or shop space, and thinking about hiring someone to build a website for you. Yes, these can be an investment in your first business, but since you’re still testing the waters, don’t go into that direction just yet. Make use of resources available to you for less. Perhaps test your business hypothesis by running it from your home, and build a basic website using Squarespace or Wix. Slowly grow your business first before you purchase any of those big ticket items.
3. Don’t make a large personal purchase
Having a business doesn’t mean you’ll automatically be financially successful in the coming years. You’re still new in the industry, and you should expect that there will be several bumps along the way. That’s why it’s never a good idea to make large personal purchases such as a house or a car while your business is still starting. You might have the money to pay for the down payment, but how can you pay the remaining amount if your business has financial emergencies? You don’t want to be placed in a situation where you’ll have to choose between paying for your house or car over financing your business for its daily operations.
4. Save for lean times and emergencies
You might think that since your business is still new, the only thing you should worry about is getting as many customers as possible. A word of caution – being new and small in business makes you more prone to financial emergencies. You’ve started something that you’re still unsure if people will actually love. That’s a risk, and this risk entails money from you. If you don’t have sufficient savings to cover your business during these times, this might be bad news for you. While you’re busy working on your product or service, don’t forget to also think about how you can save for financial emergencies. We’d recommend keeping at least 3 months of overheads in cash in your business bank account.
5. Set a clear budget & forecast for your business
It’s essential that when you start your own business, you have a clear budget as well as a forecast of your cash flow. A profit and loss budget is your financial plan for what you are going to sell, what it will cost, and what overheads you will need to pay, including interest. It shows how much profit or loss the business is planning to make each month.
A cash flow forecast is a plan of when cash will move into and out of your business. You need to have a cash flow forecast as well as a P&L budget because your payment terms might mean that your company is profitable, but your bank balance is in the red. A forecast won’t tell you if you’re profitable, but you’ll have a much better understanding of what your bank balance will be and what you can afford to pay for.
You need to plan exactly how much you should spend on your business every month, without compromising other areas. You don’t want your personal bank account to be paying for all your business renovations, right?
For more information on setting budgets, check out this article on the difference between a budget and a forecast.
6. Don’t try and do it all yourself
All of the day to day tasks associated with running your business, keeping customers happy, and managing your finances can be overwhelming, especially if you’re new to managing a business. To minimise your stress and avoid making the wrong decisions early on, hire an accountant or a bookkeeper to keep you on track. These people have years of experience in business, and their inputs will be valuable in your own business.
Irena Mckenzie is based in Castle Hill in Australia and is a very experienced mobile bookkeeper and successful small business owner. She has many years’ experience in all facets of bookkeeping and office work. She has run various small businesses and understands exactly what it takes to get a small business up and running at full speed.