Start-ups are fragile due to how long they have been in business. They need to invest in the right ventures to get the dividends. As we know cash is the lifeblood of business, when there is a deficit, the business may shut down. This is one of the reasons start-up businesses fail. There are a couple of reasons why when starting a company and the list of what could go wrong. However, here are five personal finance mistakes new start-ups should avoid:
1. Buying what you don’t need
When you start a new business, it’s understandable to want all new laptops, a cool website, trendy office location, best-in-class software, and a highly talented staff to help grow the company. However, if you’re itching to make major purchases (even if they feel like investments) near the beginning of your business, think these decisions over very carefully. Some expenses like building a website or attending an industry trade show will be mandatory depending upon the type of business you’re starting, but you need always to ask yourself if the expense in question is going to help you generate more revenue in the short-term. Grow your business first and accumulate a higher level of disposable cash before spending on the “unimportant”.
2. Taking debts
Even if you have separated your personal and business accounts, some situations can force you to dip into your personal funds to finance a business need, such as an expansion into a new niche category or a marketing campaign that promises to deliver a high return for the company. During the first year of your business, there are a lot of unknown variables and unexpected learning opportunities that’ll come your way. The reality is that you’re going to hit roadblocks. You’re going to have failures and some of these may come with a big price tag on them. If you’ve rushed out and purchased a car, home or another large personal expense and your business has something unexpected come up that means you won’t be able to pay yourself next month.
3. Keep money in reserve
Keep an ample stash of savings at hand for unexpected expenses. Call it saving for a rainy day as there will be times when something unforeseen happens and covering the cost using your credit card is a shortsighted solution that only tends to create more problems down the line. Most financial planners advise entrepreneurs to keep at least three months’ worth of expenses in an emergency or contingency fund for both their business and their personal expenses.
4. Understand your taxes
Don’t make the same mistakes that many entrepreneurs have made regarding the location, incorporation or structure of their company as it relates to taxes. Different types of businesses have different federal and state tax obligations, which allow governments to finance infrastructure and programs that benefit citizens. Plan accordingly as this is now just a part of being in business for yourself. For the first time in your life, a tax advisor could be your best friend.
5. Failing to analyse your cash flow
Based on a U.S. Bank survey, 82% of startups and small businesses fail due to poor cash-flow management. Start-ups need to analyze and manage their cash flow to more effectively control the inflow and outflow of cash. Depending on the sensitivity of their financials, this may be done daily, weekly or monthly.