By Dixie Somers
As a budding entrepreneur, you’ve probably heard staggering statistics about the number of startups that don’t make it past the year mark. Half of all small businesses fail within five years, with as much as 80 percent not making it through the first 12 months. While there are countless reasons that a business goes south, many of these mistakes are financial oversights that cause companies hemorrhage money until they eventually go belly-up. The good news is that plenty of visionary entrepreneurs have tried and failed, so future startups can learn from their mistakes. Read on to learn about some of the biggest financial mistakes that can sink a business before it even has time to take off.
Relying on Sales Volume
This means starting a business with too little capital and imagining that profits will keep you afloat. The first year of any small business is a struggle, and while you’re building your brand and getting your name out there, you are probably not going to make enough sales to get through the dry months. Don’t count on money that isn’t there. Crowdfunding is a popular method for gaining financial and community support for your business or product, so if you are lacking in resources, consider doing some fundraising before you jump into the business game.
Hiring Too Soon
In the internet age, it’s not uncommon for businesses to begin with one person at a computer handling sales, marketing, and shipping alone. It might not be the glamorous life you imagined when you decided to start a business, but hiring a staff to do work that you can easily do yourself will zap your budget fairly quickly. Yes, you might need some help to get the business of the ground, but remember that small business owners and startup CEO’s need to work extremely hard to get things going. Hiring people so that you can take it easy will drain valuable resources, so be ready to do a lot of the work yourself to save money and ensure that things are done right.
Not Hiring an Accountant
The one hire you should definitely make? Someone to help you with your books. With all the responsibilities a new business owner is juggling, it’s easy to make a mistake that can cost you a fortune if you’re trying to handle the books yourself. A licensed bookkeeper will earn the rate you pay them, especially at tax time. Even if you feel confident in your number skills, you should really turn to a professional for help with the finances. An accountant can correct any mistakes and even warn you about trends that could eventually be the detriment of your business. If you are cutting corners to save money, don’t skip the accountant—their help could be a saving grace for your company.
Mixing Business and Personal Funds
Most business owners know not to do this, but when times are tough and the money crunch is tight, it’s easy to give into temptation. You need a separate bank account, separate credit cards, and accurate spending records for your business. Otherwise, you could get in trouble with the IRS that your company never recovers from. Just as you should prepare to pick up the extra work as an entrepreneur, you also need to get used to your personal finances being tight while getting the business of the ground. Entrepreneurs who weren’t ready to sacrifice their personal lifestyle have run into trouble when dipping into business funds to pay for personal amenities.
Skipping the Insurance
When a company is first starting out, it’s no secret that funds are low. This causes many startups to cut corners on expenses they think they can survive without. Unfortunately, this mentality causes a lot of businesses to skip business insurance due to the extra expense. According to the professionals at Underwriters Insurance Brokers Ltd. who specialize in business insurance Vancouver, if your company experiences a robbery, hacking, or lawsuit, the entire operation can be shut down in one fell swoop. Even paying for minimum coverage could save your company in the case of a disaster or tragedy, so skipping this step is basically risking the entire business.
Taking Unneeded Loans
Business owners sometimes forget that banks are in the business of making interest, not of helping people succeed. Just because you qualify for a small business loan doesn’t mean you should accept it. Take the help you need, but be conservative when it comes to creating a financial burden. As before mentioned, there are other smart ways to get funds for your start up aside from getting a loan—give crowdsourcing a try, or launch your own fundraising project that will provide you with resources and attract potential customers at the same time.
Above all, remember that it’s okay to ask for help. Running a business is a learning process, but you should approach it with the right plan to ensure you keep learning for years to come. Use the resources and professionals available to you in order to help your business succeed past the first year. While the high number of failed startups likely scares you, it should also motivate you to avoid making the same mistakes.
Dixie Somers is an Arizona-based freelance writer. Follow her @DixieSomers.