One quality that separates seasoned entrepreneurs from the newbies is their willingness and ability to take calculated risks. You will notice this tendency from the world’s best entrepreneurs including Richard Branson, Arianna Huffington and Jack Ma. Irrespective of the type and scale of the business, ranging from a remotely operating technology business to a multinational corporation, there are some financial mistakes that founders should avoid at all costs.
Entrepreneurs are excellent problem solvers, owing to their trait of pushing boundaries and discovering new things about the industry they target. They look for every opportunity to recognize their limits and sail through unknown waters. The risk-taking tendency arises from the entrepreneur’s ability to associate risk with opportunity.
On the other hand, the same eagerness to take risks makes them more prone to mistakes. Indeed, entrepreneurs make mistakes all the time. The successful ones have had an equal number of successes and failures in their careers.
Some failures can be corrected immediately. Those concerning money can burn your business. The sudden drying up of the cash flow, an unexpected expense and quickly accumulating debt can bring down even the most promising idea to its knees.
Based on my experience, here are the 6 biggest and most fatal financial mistakes entrepreneurs make and how to avoid them at all costs.
#1. Failing to keep the personal and business accounts separate
Even if you are a freelancer or a solopreneur, there is no shortcut to keeping your finances separate.
Sure the convenience might tempt you to ignore this tip. Commit to creating a separate savings account and credit cards for your brand before you start collecting payments.
I ask you to do this right at the beginning so that it becomes easier to do the accounting for your business, planning for the tax payments and plan for those unpredictable months in advance.
A separate bank account and credit card account allows you to have an accurate picture of the financial health of your business. Prevent an overlap between your savings and what your business is generating and costing monthly. If you are not careful, you may fall into the pit of inappropriate use of business funds.
If in the future your business takes a downward nosedive, the separate business and credit account will prevent your credit score from getting damaged.
Tip - Separating the business and personal accounts ensures that you are focusing on growing your company and securing your future. Don’t blur these two lines, keep them separate.
#2. Making big (and often unwanted) purchases for your business
When starting a new business you may be tempted to want to get the best laptops, a plush office, top-class software and highly talented staff to help you scale your business.
Even when you are itching to make the costly purchases (which may seem like an investment), think about it carefully. The basic expenses like registering your company, developing a website and attending industry events may be mandatory and unavoidable.
Before spending a penny, ask yourself if that expense will generate revenue for you in the immediate future.
Non-essential expenses such as office parties, team-building trips and fancy co-working spaces will not improve the bottom line for your company’s growth.
While starting out, instead of going for a paid subscription to a popular CRM, go for a basic and functional free or cheaper alternative. Instead of full-time staff, look for freelancers from platforms such as Upwork or LinkedIn. Invest in virtual communication tools for your globally spread team to communicate seamlessly.
Tip - Make do with the absolute bare minimum when you are launching your business and in the early stage. Accumulate enough disposable cash before spending on the “nice-to-have” needs.
#3. Failing to repair your credit score
While you learn how to separate your personal and business finances, your personal credit score can impact the financial standing of your business.
The numerical credit score range is depicted below.
At no point should your credit score fall below 649 points. If it does, it will impact your ability to get credit in the near future. Also in the early stages when an angel investor decides to invest in your business, your personal credit score matters.
The biggest mistake entrepreneurs make is assuming that everything would be fine. This may come to bite you when raising a loan for your startup. Start with raising your credit score by honestly looking at your financial activities and assessing where you can improve.
Additional tips that you can follow are:
Pay your bills on time. Set up a direct debit so that you don’t have to remember to make the payment every month.
While taking out loans or borrowing from the credit card, know your credit limit. The amount borrowed shouldn’t exceed the third of your credit limit.
#4. Taking loans for personal purchases
It is not uncommon for entrepreneurs to face a scenario where they are forced to dip into their personal funds to finance the business. This could be for expanding to a new niche or geography or for a marketing campaign that promises to deliver results.
Especially during the first few years of your business, there would be numerous roadblocks you are going to hit. While failures are unavoidable, some would accompany a huge price tag. If you have taken loans for a car or a home, an unexpected business expense may strap down your savings.
Tip - While growing your company, stay as lean as possible, both in business and personally.
#5. Not saving for emergencies or a downtime
Every financial expert will tell you to have ample savings for unexpected downtime.
A lack of proper cash flow management can sink many businesses. Research by the Association of Chartered Certified Accountants found 82% of businesses fail because of cash flow issues. For those entrepreneurs who are not financially savvy, cash flow management becomes a liability in times when business is in the initial stages.
The rule of thumb is that entrepreneurs should keep a minimum of three months’ worth of expenses saved for emergencies. In the current times of COVID-19, numerous industries have been paused, and a contingency fund could be your savior.
Don’t let this issue dismantle your business because you did not pay attention to the financial health of your business.
Tip – Set aside a percentage from your profits each month that you wouldn’t touch unless in an emergency.
#6. Failing to set clear budget goals
A clear budget plan guides you on what you can and can’t afford to spend every month.
Your company may not see the light of the day if you fail to create a financial plan. How else would you know what works and what doesn't? Which activities generate the maximum revues and what should be tweaked?
Setting clear budget goals is all the more important for founders because your job is to take your business to profitability.
Tip - A carefully chalked budget for operations, employees, marketing and technology expenses increases your financial discipline, making the road-map to your business growth easier.
Master your money matters to stay away from financial disasters that can cost you your business.
In business, it’s easier to lose money than earn it.
Failure in business is a result of a series of bad decisions and financial mistakes. You can stay away from these 6 deadly financial mistakes by paying more attention to your cash flow throughout the year.
The key to succeeding financially is by planning your budget, tracking your expenses, saving for emergencies and keeping your business and personal expenses separate. Don’t stop thinking about new ways to generate revenue for your company.