Working for yourself is one of the biggest reasons to become an entrepreneur. But as pointed out in a post here on Prudent Money, starting your own business is not as easy as one might think. There’s a lot of trial and error involved but when it comes to finances, the risks you take should be less of a gamble and more calculated. And while there are no guarantees in this field, you can increase your chances of success as a business owner by avoiding these common money mistakes: • Poor cash flow management Income, borrowed funds, expenses, payroll, and debt are some of the components of a business’s cash flow. In the beginning, most of the money is going out instead of in as businesses pay for inventory, equipment, and other expenses. Underestimating costs and overestimating revenue are mistakes that should be avoided at all costs. A guide to better cash flow management by Inc. explains that taking a monthly look at your cash inflow and outflow is a must to keep it under control. Some steps you need to do include collecting payments on time, considering customers’ credit, securing healthy loans, incentivizing early payments, and, of course, focusing on boosting sales. And before making any major purchases, evaluate if these are necessary for the business. Do you need state-of-the-art technology or a modern office, or can your business survive without them for the time being? Also consider if renting equipment or a commercial space is better than buying, and if obtaining financing through loans or fundraising can ease your cash outflow problems. • Not separating personal and business accounts The second biggest financial management mistake many new entrepreneurs make is not having a separate account for the business. As inconvenient as it can get, you’ll save yourself a lot of trouble later by having separate accounts for savings, checking, credit, and loans for your business now. Aside from that, forming a limited liability company (LLC) can also help safeguard your personal assets. Compared to the default sole proprietorship, this business entity limits the liability of the owner (or owners) of the business. It simply means you can protect your personal assets from lawsuit settlements or debts that the business can’t pay. An article on forming an LLC in Texas by ZenBusiness explains how it can be done in the state through five easy steps, which every state follows more or less. The filing fee is a little steep at $300 compared to other states, but it’s a small investment that can secure your finances as a small business owner later on. • Incurring too much debt Every business will have some amount of debt in one form or another. Whether that’s good or bad will depend on how it affects your business. For example, getting financing to scale can be good with a solid business plan but not if there is no clear protocol for how and when you will repay it. To pay off debt and prevent your business from going under, writer Kristie Lorette compares it to eliminating personal debt. You need a budget and better cash flow management, which should include paying off high-interest loans first. Interest from debts like credit card debt can eat into your business’s income in no time. You can also try negotiating with lenders, getting more funding, and consolidating your debt. • Neglecting to build an emergency fund If there’s one thing that this pandemic exposed is that all businesses need a rainy day fund. For instance, Texas restaurant owners have been told recently to stop waiting for financial relief from the government. These stimulus checks are simply not enough to cover the economic consequences of state-wide lockdowns caused by the pandemic. Generally, businesses are recommended to have three to twelve months’ worth of expenses in case of emergencies. It can be saved in a high-yield savings account, money market funds, or short-term certificates of deposit to get better interest rates. An emergency fund might not be enough to cover rent or salaries in the long-term, but it certainly couldn’t hurt to have cash reserves at a time like this. Do you have any experiences to share as an entrepreneur? Leave a comment down below!
Blog Credit: Leigh D. Davis