\n\t\t Entrepreneur \t<\/p>\n
You\u2019ve built a business from the ground up \u2014 congrats!<\/p>\n
But even the most innovative founders can make mistakes when it comes to finances. After all, every aspect of your business is supported by financial discipline. When mistakes are made early on, they can snowball into significant problems.<\/p>\n
Based on my experiences and those of other founders, the same mistakes seem to be repeated. Thankfully, with awareness and discipline, these flaws in financial strategy can be avoided. Here are seven financial mistakes even smart founders make, and how to avoid them.<\/p>\n
Related: <\/b>I Thought I Knew Finance \u2014 Then I Took Over My Family\u2019s Franchise. Here Are The Hard Truths I Learned.<\/b><\/p>\n1. Mixing personal and business accounts<\/b><\/h2>\n
Failing to separate your business and personal finances is the most common and dangerous mistake founders make. Innocently enough, it starts as a personal card for a business lunch, but soon spirals out of control.<\/p>\n
The problem:<\/b> By mixing funds, you blur the legal line between you and your company. Your assets (such as your home and savings) could be at risk in a lawsuit. Moreover, it creates a tax nightmare which could result in audits and penalties. Also, it\u2019s hard to make wise decisions on profitability and cash flow because of an inaccurate financial picture.<\/p>\n
The fix:<\/b><\/p>\n The majority of small businesses are bootstrapped, with 78% using their own funds to get started. Although self-reliance is admirable, it often means your company has no business credit score at the start, which severely restricts your financing options.<\/p>\n The problem:<\/b> Due to your startup\u2019s limited resources, you may need to seek outside funding for equipment or inventory. If you don\u2019t have a credit history for your business, you may be unable to secure loans or lines of credit, which can halt your company\u2019s growth.<\/p>\n The fix:<\/b><\/p>\n It\u2019s possible for a company to be profitable on paper and still fail due to a lack of cash. Many startup founders are so focused on revenue that they forget cash flow is their business\u2019s lifeblood.<\/p>\n The problem:<\/b> You land a big client and hire staff to do the work. Unfortunately, you won\u2019t receive your payment for 90 days. Due to a cash flow gap, you\u2019re unable to pay your bills. It\u2019s the classic \u201cgrow-or-go\u201d trap, where rapid growth outpaces your ability to manage cash flow. In fact, due to cash flow issues, 82% of small businesses fail.<\/p>\n The fix:<\/b><\/p>\n Related: <\/b>Smart Business Owners Know the Difference Between Profit and Cash Flow. If You Want to Make Money, You Should, Too.<\/b><\/p>\n Taxes are more than just a year-end problem; they\u2019re a fundamental part of a company\u2019s strategy. As such, ignoring them is a costly mistake.<\/p>\n The problem:<\/b> You could face a massive, unexpected tax bill that wipes out all your cash reserves without proper planning. An incorrect legal structure, such as an LLC versus an S-Corp, can also result in overpayments. You\u2019ll miss out on thousands of dollars\u2019 worth of legitimate business deductions without proper bookkeeping.<\/p>\n The fix:<\/b><\/p>\n Passionate founders often hesitate to charge what their products are really worth. In addition to leading to burnout, this is not a sustainable business model. As McKinsey points out, overcharging isn\u2019t the most common reason for improper pricing. Instead, up to 90% of improper pricing issues are caused by underpriced products.<\/p>\n The problem:<\/b> When you underprice, you may not be covering your actual costs, such as overhead, marketing and your own time. In addition, you attract the wrong kind of customers \u2014 those who are demanding and quick to leave for an even cheaper alternative.<\/p>\n The fix:<\/b><\/p>\n Founders are often visionaries, not accountants. However, avoiding financial planning is like flying a plane without a dashboard.<\/p>\n The problem:<\/b> When you make hiring or expansion decisions without a solid financial plan, you\u2019re flying blind. As a result, you miss out on opportunities, such as determining which products are most profitable. Also, if your financial records are messy, no investor will invest in you.<\/p>\n The fix:<\/b><\/p>\n Related: <\/b>How Setting Clear Financial Goals Leads to Business Success<\/b><\/p>\n As crucial as delegation is, founders also need to take the hiring process into account. Overhiring can hurt a company\u2019s burn rate, or the rate at which it loses money.<\/p>\n The problem:<\/b><\/p>\n Your early employees shape the culture and mission of your startup. A rush to hire can result in poor fits, higher turnover rates and a significant drain on your finances. If you hire people who aren\u2019t the right fit, you\u2019ll spend much more than the average cost of hiring someone new, which is around $4,700.<\/p>\n The fix:<\/b><\/p>\n Innovators are masters of innovation, but a solid financial foundation must support their innovation. The thing is, there\u2019s no reason for these mistakes to occur. When you approach your finances with the same passion and attention you devote to your product, you can ensure that your business not only survives but thrives.<\/p>\n<\/p><\/div>\n\n
2. Not taking care of your credit score<\/b><\/h2>\n
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3. Underestimating the importance of cash flow<\/b><\/h2>\n
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4. Ignoring the tax implications of your decisions<\/b><\/h2>\n
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5. Under-pricing your product or service<\/b><\/h2>\n
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6. Avoiding financial planning and record-keeping<\/b><\/h2>\n
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7. Rushing to hire new employees<\/b><\/h2>\n
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The Bottom Line<\/b><\/h2>\n