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Avoid These 10 Financial Mistakes Entrepreneurs Make


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When you start your journey as an entrepreneur, you’re also signing up for an adventure that 80% relies on chances or luck. You burn the boats and decide to take over the island with your brilliant idea — definitely an exhilarating feeling.

You’ve got the vision to create and grow something special, exactly how you’ve always wanted to. Yet, within five years, 85% of your business will be dead. It sounds harsh, but it’s the reality of business.

Let’s talk about the 10 most common financial mistakes entrepreneurs make and how you can avoid them.

1. Undercapitalization

Many businesses fail early due to undercapitalization or insufficient capital balances. Business owners extremely underestimate the cost of getting their idea off the ground and into a thriving, profitable business.

Startups usually assume they only need a specific amount of cash in the bank, and it’s all good. This, however, results in higher expenses, and profitability takes longer to reach, leading to a shorter financial runway.

Solution: Outline a very detailed business plan that profiles all your business needs to maximize the use of your capital and eventual cash flow. This strategic planning should highlight startup costs, operating expenses, legal costs, hiring needs, and marketing, as well as include a buffer for unexpected situations. Manage your expectations, as it may take a little while before your business breaks even or achieves profitability compared to what you initially forecasted.

Related: 9 Financial Mistakes to Avoid in 2024

2. Overly optimistic financial forecasting

Every entrepreneur I know started enthusiastic and exhilarated; when you metaphorically burned the boats and rushed the island, nothing could stop you as you pictured every potential customer seeing the brilliance in your new business. However, you’ve got to remember how challenging business startups are. You’d benefit from having someone play the devil’s advocate on your forecasting and discuss how you could prepare for challenges and delays that often come when you’re brand new in the business. More often than not, overestimating revenue and profitability leads to overspending and financial strain, leading to startups running out of money.

Solution: Implement a process for speaking with financial experts or other business owners who’ve successfully started a company to share your financial forecasts and get objective feedback. Make contingency plans to consider where money will come from if your sales aren’t as fast as expected.

3. Mixing business with personal finances

It’s tempting to mix your money and expenses with business expenses when you’re an entrepreneur. While it’s important to eventually pay yourself (once profitable) for driving your business forward, you’ve got to keep in mind that blurring the financial lines between these accounts can lead to economic disaster. This also complicates accounting and tax obligations, putting your personal and business finances at risk.

Solution: Keep a separate account and budget for personal and business finances to ensure clear, accurate bookkeeping. Do not blur the lines between legitimate business expenses and personal spending. Your tax professionals will thank you.

Related: 4 Common Money Mistakes Attributed to ‘Financial Illiteracy’

4. Overspending on startup costs

It’s indeed tempting to invest in all the latest technology or trendy office spaces when you’re too excited to finally see your dream business come into life. However, keep in mind that your business is brand new. You shouldn’t be depleting your resources on non-essential expenses that can eventually leave you financially vulnerable. Many startup founders want to appear established and legitimate right off the bat, so they overspend to try to gain credibility in the marketplace.

Solution: Focus on generating revenue and client acquisition before indulging in any luxurious expenditures. Remember, profitability is your goal; it’s the lifeblood of your business. Investors in your business and good potential clients will respect your scrappy and resourceful approach to running your new business.

5. Neglecting financial metrics

A great idea and a burning passion are not enough to make your business successful and thrive in the long run. It may take off, but many entrepreneurs eventually become like ostriches who bury their heads in the sand, hoping their financial issues will solve themselves. This lack of awareness of your business’ financial health leads to poor decision-making and could take your business down.

Solution: Engage with financial professionals and experts to analyze and benchmark your business against industry standards and to scrutinize your financial health regularly. Objective financial advice will help you prepare for the different phases of growth and struggles inside your business, which will inevitably come your way.

6. Building your safety net

Startups are the most susceptible to market volatility and threats. This means keeping a cushion for rainy days can greatly help you avoid business shutdowns and halts in your operations. Reigning in your financial forecasting and working with experts to get a view of your numbers may not be enough. After all, there’s no one-size-fits-all solution to any business problem.

Solution: Commit to allocating a portion of your profits to an emergency fund. Just like you wouldn’t want to spend your entire paycheck every month, you should put some of your budget in reserve accounts, especially when money comes in.

Related: Facing Financial Trouble? Here Are Your Options

7. Falling into big debt without a plan

While borrowing is sometimes necessary for a business, accruing significant debt without a clear repayment strategy can lead to financial ruin. Many businesses turn their balance sheets upside down with debt mismanagement, whether through traditional business loans from banks or business credit cards.

Solution: Manage your borrowing judiciously. Secure loans with favorable terms and ensure you have a solid repayment plan. Focus on using debt only when essential and ensure that your cash flow can sustain the debt.

8. Ignoring tax obligations

For many, tax is a complex and cumbersome discussion, but ignoring it can result in hefty fines and legal troubles. Despite this, many entrepreneurs still do not pay the proper quarterly tax estimates, have no tax strategy for their businesses, and do not realize that their revenues and sales will be taxed at the end of the year.

Solution: Bring in a tax professional who specializes in working with entrepreneurs. This way, you are confident that your business adheres to tax laws and enjoys any available deductions and credits. You can also utilize tax savings to grow your workforce and tap into new markets.

Related: Save Yourself Money and Avoid These Top Tax Filing Mistakes

9. Lack of investment in human capital

Remember that your team is your most valuable asset. Skimping on hiring skilled and talented people can stunt your business’s growth. Similarly, holding onto the wrong-fit employees for too long will hinder progress and eventually hurt the culture. Failing to hire and keep good talent is a sure way to failure. Don’t dare to do it all yourself when you can invest in quality team members.

Solution: As Jim Collins said, getting the right people on the bus and in the right seats is the key to a successful business. Don’t take hiring top talents lightly, and even more so, retaining them. Your business standing directly ties to the quality of your team.

10. Not reinvesting in your business

It’s tempting to withdraw all of your profits as personal earnings, but excessive withdrawals can deprive your business of the capital needed for growth. Your business is not your piggy bank. This goes back to the point of keeping some respectful separation between your personal bank account and your business funds.

Solution: While short-term profits are tempting, reinvestments have a more long-term impact on your business. This strategic move builds a sustainable growth engine through marketing and workforce development.



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