Starting a business is a difficult task, but running a business is even more complex. Many entrepreneurs fail at this endeavor for one reason or another. However, the most common reason businesses fail is due to the financial mistakes their owners oftentimes make. These mistakes usually have dire consequences.
Even a simple financial mistake has the potential to ruin your business entirely. That’s why it’s very important to plan well and develop a strategy that will help your startup business become profitable. Mistakes are common in the business world, but with a bit of effort, they can also be easily avoided. That being said, here are a few financial mistakes every new business owner should avoid.
Neglecting a budgeting plan
Many entrepreneurs start with their business development without carefully considering a budgeting plan. If you plan on improvising, you’ll soon end up facing difficult financial challenges. Determining a budget for your business is crucial for its development and growth. Starting a business requires an investment and there are also expenses required to develop it further.
You should conduct financial forecasting and budgeting to determine income projections and expenses. You should also have funds saved up in case you run into any unexpected cost and expenses you didn’t actually plan for. Without a proper budget to support your business financially, you may soon run out of funds needed for business growth.
Forgetting to invest in a branding strategy
Branding is crucial for any startup business, because it helps boost your marketing efforts, helps establish more personal relationships with your target audience and elevates your business to a highly competitive market. Having a developed branding strategy is essential, even before you make the first step to register a company.
The main reason is that you’ll be able to grow your brand from the very start and reap the benefits early on, instead of improvising along the way. Once your startup is ready to hit the market and start generating revenue, you’ll already have a brand to help boost your presence, as well as customer engagement and loyalty on the market.
Underpricing your work
One of the financial mistakes many new entrepreneurs make is underpricing their work. This mistake usually comes from inexperience and willingness to gain a competitive advantage early on. However, underpricing your products or services just to outrun your competitors on the market can be a costly mistake in the long run. To better understand the situation you must look at your gross margin and costs of goods sold (COGS).
For example, COGS is calculated by including expenses required to produce a product you’ll be selling. That includes production, labor, and manufacturing costs of goods, not including marketing efforts made to make a sale. As for the gross margin, it’s calculated from total sales revenue, minus the costs of goods sold, divided by the total sales revenue expressed in percentage. Therefore, if your gross margin is 50% it means you retain only $0.50 of every revenue dollar. Therefore, if you underprice, you won’t generate any profits from your sales.
Not hiring an accountant
A lot of entrepreneurs avoid hiring an accountant to cut costs early on. However, unless you know exactly how to do your taxes and manage your finances, this can be a huge financial mistake. Accountants are financial advisors. Their accounting services will help your business reach success.
Accountants can manage your books, file your taxes and give you valuable advice on how to manage your finances or make important investments. As a matter of fact, having a financial advisor on board is one of the surest ways to avoid costly mistakes.
Not planning for taxes
Government bureaucracy is something that cannot be avoided. In order for your business to operate legally, you must deal with your tax obligations. Forgetting about taxes or nor filing your taxes properly will result in hefty fines, as well as legal trouble that may cost you even more.
As a self-employed business owner, you must take an initiative to do your taxes. Otherwise, your expenses will pile up and you may end up using all of your funds allocated for business development to cover your taxes. This one mistake is something you should do your best to avoid altogether.
Not having an emergency savings account
As mentioned before, unexpected costs are common when running a business. If you’re not adequately prepared to handle these expenses, you’ll end up in even more financial difficulties. Unexpected costs could be anything from interest rates, fees for unpaid bills, costs of equipment repairs and medical bills.
That’s why having an emergency savings account is crucial for your startup businesses. Having funds set aside for rainy days can help you cover unexpected costs and avoid risks of ending up in more financial difficulties. Financial advisors recommend that every startup owner allocates at least 3 months worth of expenses to their savings account. That way, you’ll be properly prepared for any unexpected costs.
Not having proper insurance
Entrepreneurs oftentimes neglect business insurance to save a bit of money on the costs. However, the lack of insurance means enormous expenses in case something goes wrong. No startup owner can cover the expenses of legal claims and similar inconveniences out of their own pocket. Proper business insurance protects both the owner and business assets from legal disputes and claims.
For example, every business should have general business liability insurance to protect itself from lawsuits. Also, if you have employees, workers ‘ compensation insurance covers medical bills and lost salaries due to injuries on work. In exchange for the insurance policy, employees forfeit their right to sue you if they get injured. There are other insurances you can opt for depending on the nature of your business. Make sure you determine which insurances you need and prepare a budget to obtain all the necessary policies.
Financial mistakes can be very costly and can even ruin your business entirely. Many entrepreneurs follow their instincts when developing a business instead of planning carefully. However, without a solid plan and a good strategy, it becomes easier to make a mistake rather than avoid it altogether.