5 financial mistakes to avoid when starting your business
Monday, 29 March 2021
The many upsides of entrepreneurship — setting one's own hours, professional autonomy and the potential to earn more money — can distract some would-be entrepreneurs.
But for most, the idea of creating a unique shopping experience for future clientele, crafting delicious recipes at a new restaurant or being the type of boss they've always wanted is what draws them into a solo venture.
All of these are exciting, but there are also a number of downsides to entrepreneurship to be aware of before closing your first sale. In particular, there are some common mistakes that could derail your business unexpectedly if you're not prepared for them. Here are five common mistakes to avoid so that your business endeavor can flourish.
1. Not having a solid business plan
It's not unusual to hear from some entrepreneurs that they "fell into" their business. You may be an incredible baker and so many people love your baked goods that you decided to pursue it as a professional venture. Or, you have a skill that people keep asking you to teach them, so you've decided to parlay that into a business. In both examples, there may not be an official business plan at the onset, but that doesn't mean you don't need one.
A business plan gives you the opportunity to develop business goals. It will also give you a chance to project your future revenue vs. expenses. You can be as detailed as you would like while working through this process. Asking yourself questions concerning liquidity, or access to cash, should also be considered as you review your business plan. If you're unsure about how to draft a business plan, the Small Business Administration provides guidance and online resources to assist you in the process.
2. Commingling your finances
For many new entrepreneurs, commingling their business earnings with their personal finances is a common mistake many people make. This easily avoided error can wreak havoc on your ability to understand your business finances and potentially impact the liability coverage you may have for your company.
Even if you're a sole proprietor, it's a good idea to open a dedicated bank account specifically for business operations. Keeping your finances separate can help you much more easily understand your revenue streams, expenses and any unusual patterns in the financial health of your company. You can also connect accounting software to your business accounts to create a daily financial snapshot of your company's finances.
3. Ignoring the importance of business credit
Many new entrepreneurs may not understand how important it is to build business credit. Many such professionals only discover their need for business credit during times of business expansion, hiring and other significant moments in the life of their business.
What's imperative about business credit is that it is separate from your personal credit. This is helpful to business owners who may be cleaning up past credit mistakes or would prefer to access lending and borrowing without the need to use their personal credit score.
4. Borrowing against your personal assets
There are a number of ways to finance your business. Entrepreneurs can access a business loan, line of credit, grants or tap into their assets to fund their business. Many business owners tread the fine line between irrational spending, strategic investing in their dream or making bad financial decisions. This is the moment when many individuals make ill-advised financial decisions that may put their personal wealth at risk.
These mistakes include borrowing against one's home when advised not to, cashing out retirement funds or making a financial misstep that may take years to recover from.
Before borrowing from yourself, research the different funding options that maybe available to you. In addition to applying for a business loan or line of credit, you can also consider a crowdfunding campaign, explore peer-to-peer lending or find an angel investor who believes in you and your business.
5. Not understanding your business taxes
It's often said that the only two certainties in life are death and taxes. Taxes are a normal part of doing business in the United States. However, no one expects entrepreneurs to know and understand every aspect of the tax code.
Working with professionals such as a certified public account (CPA), a bookkeeper or both can make the difference between having a bad tax year or a normal one. Establishing a dedicated bank account for your business is also key to creating financial clarity. In addition, understanding the importance of maintaining up-to-date and accurate financial records will keep entrepreneurs from dealing with tax pain during tax season.
Growing and maintaining a healthy business can often feel like an intimidating process. Fortunately, entrepreneurs can simplify their business finances by establishing financial best practices that can be put into use starting the first day of their business.
The content provided is for informational purposes only. Neither BBVA USA, nor any of its affiliates, is providing legal, tax, or investment advice. You should consult your legal, tax, or financial consultant about your personal situation. Opinions expressed are those of the author(s) and do not necessarily represent the opinions of BBVA USA or any of its affiliates.
Links to third party sites are provided for your convenience and do not constitute an endorsement. BBVA USA does not provide, is not responsible for, and does not guarantee the products, services or overall content available at third party sites. These sites may not have the same privacy, security or accessibility standards. Consult your legal counsel for advice concerning your specific business activities.
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