Avoid These Common Business Finance Mistakes
All new businesses start with high hopes and bright horizons. They are excited about their up and coming company, high-demand services, and reputable employees. It seems as if little can get in their way.
But, statistics in the business world show that many businesses fail within the first two years. Why is that? More often than not, it is due to finances and mismanaged money.
Many new business owners crumble under the burden of finance management. Others will ride the waves of challenges a new business brings. Being a successful business really boils down to having strong finance and accounting skills.
What are the most common financial mistakes, and what are the best ways to combat them?
Taking on Credit Card Debt Early On
Maybe you expect to make quick revenue to pay off many of your investments. You are relying on revenue to help pull you out of the debt that you have built up. But, credit card debt can really drag your business down.
At the beginning of your business venture, you should use your credit card only within your means. If you take on a heavy load of credit card debt, you will be drowning for a while without reaching a profitable level of business.
Instead of making all your purchases right away and putting yourself in debt, it’s better to stagger your purchases. If you can’t afford it now then you need to wait. This includes both large and cumulative small purchases.
Not Having a Clear Budget and Business Plan
One of the biggest mistakes you can make is not having a detailed budget and strategic business plan. Without these crucial planning steps, your business will fail. If not at the beginning, then most likely when you face a crisis.
So, sit down and make a budget! This will give you have a good idea about what your expenses are and your expected income to pay for them. Having a clear budget also sets you up for your deductible business expenses when tax season rolls around. You can use the categories provided by the IRS to organize your expenses.
Ultimately, you want your business to move in the direction of profit. In order to achieve that, you must have a realistic budget. You should also plan for emergencies or further investments to grow your company.
A business plan that is concise and descriptive is also a necessity. You actually need this to apply for a business loan. Banks want to see that you have a strategy that looks promising. They want to make sure you can pay off the loan plus the interest.
There are a few different ways you can go about creating a business plan. You can find services online to help you, or you can design your own by doing some research. The point of a business plan is to define who your company is, what products or services you will provide, and how you expect to make a profit.
Waiting to Apply for Financing Until You Need It
All businesses need financial support to get going. Whether that’s from investors or a bank loan, you will need to rely on outside money to give you a boost. The question is should you wait to apply for financing until you need it?
The simple answer is no. You may want to apply for financing early on before you even need it. Being in better financial standing means that banks will offer you a better variety of loans. They are more likely to offer you one with lower interest rates and a longer payback period.
Not Separating Personal and Business Accounts
It’s actually surprising how many businesses start this way. Not getting a proper business account can strongly impact your financial management. It becomes very difficult to differentiate between your personal expenditures and the business ones.
One of the first steps in registering a business is having a business bank account. Not only does this simplify your business accounting, but it will also make doing taxes a whole lot easier. Most accounting programs require a link to an account, so make sure you have a separate business account.
Taking on Too Many Upfront Costs
It can be exciting to buy all the best equipment, office supplies, and technology. The biggest question you have to ask when purchasing these things is what will create the most short-term revenue?
If you buy a bunch of items that either don’t give you direct revenue or are more long-term returns, then reconsider your purchases. These types of big purchases at the beginning could drive your company deep into debt and will take away from short term profits.
Not Preparing for Self-Employed or Small Business Tax
Taxes can be confusing for new business owners. Either you will file as self-employed or as a small business.
Self-employed filers will pay a higher tax rate since they don’t pay taxes in other areas. You can lower this tax by claiming as many deductions as are reasonable. You will also want to consider signing up for estimated quarterly payments to avoid a large bill at the end of the year.
Small business tax has a few different aspects to it. Depending on your particular business, you will have to look into income tax, employment tax, excise tax, and international tax.
It’s important to stay up to date on the latest tax laws since they tend to change a bit from year to year as new laws are passed in Congress. You also need to be diligent about your deductible business expenses. You can deduct expenses for:
Avoid These Mistakes Before You Start
Some businesses like to get up and run as fast as they can. But, in order to be successful and profitable, you have to do some major planning. It’s important that you have a detailed budget and business plan. If you’re prepared, you can handle anything that comes your way.