Avoid THE Biggest Financial Mistake Business Owners Make
Congratulations on starting your own business! Owning your own company can be an extremely fun and exciting journey. However, regardless of whether you’re operating an LLC, partnership, or corporation, there is one thing, in particular, that could be the death of your business. It’s the biggest financial mistake new business owners make, and I’m going to help you avoid it.
The Biggest Financial Mistake Business Owners Make: Using Money You Don’t Have
When you first started your business, you probably had high hopes about making profits as quickly as possible. You knew you had to get everything you needed to be successful and put yourself in position to win. However, lines sometimes get crossed when we start confusing “wants” with “needs.”
You don’t NEED everything right away in order to start showing profits. In fact, if you can start your business lean, you’ll be better off in the long run. Businesses make their biggest financial mistake when they start spending money they don’t have. This could be by taking out loans with high-interest rates, or spending all available capital in the bank account — ultimately draining the pond and leaving you with nothing.
If you don’t have enough money coming in to replace what you’ve spent, you’re going to be financially backward, which could cause you to dissolve your business and give up your dream. You don’t need the most high-tech computers out there. You don’t need a 45,000-square-foot warehouse if 5,000 will do. You don’t need to buy the newest location on the block to use as your office… especially if your business doesn’t need clients or prospects to physically walk through a door. You don’t need the fanciest sign out in front of your business if there’s no need to draw foot-traffic (such as if you have an online business). It’s the biggest financial mistake going out and getting a bunch of stuff that isn’t 100% necessary to run and operate your business.
Save your money and invest it back into your business on things that will help with your growth rather than wasting it on frivolous items. Doing this could be the biggest financial mistake you’ll ever make.
If you don’t need to take out a small business loan to start your business, DON’T! There’s nothing worse than starting a business with heavy debt before you even open your doors. Again, start lean if you can. Later on, when you’re profitable and looking for exponential growth through a new addition to your business, look at that point to bring in investments or take out a loan. However, know that it will be extremely hard to get investors or even a loan with zero business credit.
BONUS! More of the Biggest Financial Mistakes
I have a bonus for you in terms of the biggest financial mistakes new business owners make, and it’s something surprisingly many people fail to understand. When you open a new business, you need to separate your finances. Just because you already have a checking account at the bank does not mean you should be paying business expenses out of your personal account. Open up a new business account immediately to draw a clear line in the sand of what expenses are for your business and which ones are for you personally.
1. Skip the Pile of Receipts
When you mix business finances with personal finances, you’re going to need a large bottle of Tylenol for a headache that is about to ensue. One of the biggest financial mistakes you can make is mixing accounts. Remember, even if you have an LLC and file everything under your personal 1040 for the year, you are going to need to keep everything related to your business separate so you can include a Schedule C with your 1040 tax form.
Think for just a moment how many personal expenses you have and how many you’ll additionally have for your business in a given year. Now, take all of those receipts and try to sort through them all come tax time. It’s enough to drive yourself mad. So, take my advice and skip the (second) biggest financial mistake new business owners make. Keep a separate account and separate bookkeeping/expense tracker to make your life easier in the long run.
And if you don’t have some sort of bookkeeping software, you’re going to end up pulling your hair out. The two that I recommend are QuickBooks and FreshBooks. These two are incredibly easy to use and will make your bookkeeping life so much easier.
2. Protect Your Personal Assets
If you are paying business expenses out of your personal account and get sued, guess where the money from that judgment is coming from? You got it — your personal account. You need to separate church and state and make sure there is no overlap that could sway a judge’s opinion on how to settle any debt or lawsuits brought up against you. And the “it will never happen to me” mindset could very easily ruin your life if you take that gamble. Protect yourself and your personal assets — open a standalone business account.
If you’re not protecting your assets and keeping your business and personal accounts separate, you’re going to be left with one of the biggest financial mistakes of your life.
3. Establish Credit for Your Business
As mentioned earlier, if you are in need of capital to fund an expansion of your business, you’re going to need some sort of credit for your business. The best way to build business credit is through a business bank account in the name of your actual business. Additionally, you can open a business credit card to charge all business-related purchases on. Not only will this help keep your business and personal expenses separated, but if you are paying any interest on large purchases, that interest is tax deductible (whereas with your personal credit card it is not).
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