The 5 biggest money mistakes new business owners make, and how to avoid them
By Hannah Massen
The American dream of opening a small business is still alive and well – but the key is to not become a statistic. Data from the Bureau of Labor Statistics shows that 20 percent of businesses fail within their first two years of being open, 45 percent during the first five years, and 65 percent during the first 10 years. Why? Most business owners cited low cash flow as the reason why they were forced to close their doors.
Every business owner is bound to make one bad purchase when they’re getting up and running (did you really need to install that LED-light “selfie wall” display?), but small financial mistakes can quickly become standard practice. That’s why it’s never too late – or too early – to reevaluate your money management habits.
Here are the five most common financial mistakes new business owners make
and how to avoid them:
1. Not having a budget. Budgeting is critical – period. Setting clear limits on how much you can spend and when will keep you from overestimating your business’ limits. Overspending when business is slow could cause you to take out a loan or run up credit card debt. Instead of guessing how much you will have spent by the end of the month, reserve enough money to cover your ongoing expenses with a little extra to pay for last-minute needs. Whatever’s left over could be put towards a savings fund for big-ticket items or a growth opportunity.
2. Mixing business and personal bank accounts.
“I’m just a freelancer,” or “I’m not even making a profit right now” are not excuses to keep your personal and business bank accounts combined. Freelancer, entrepreneur, solopreneur, and consultant are titles we use to distinguish our roles, not our worth. And when you’ve got income you’re declaring on a 1099, you need a separate bank account. Using personal accounts or funds for business transactions (or vice versa) can create major issues with balancing accounts, measuring profit, filing taxes, and setting clear financial goals. You want to keep track of every penny your business is making and spending, which is why you don’t want to confuse the new sofa you bought with the cost of equipment. You should also apply for a business credit card to help you stay on top of expenses.
3. Neglecting business insurance.
Just like purchasing a home or car insurance plan, having business insurance protects your company from being hit with a steep bill when disaster strikes. Some new business owners make the mistake of canceling their coverage before having a new policy in place, or not choosing a policy that fits their business’ needs. Carefully review your options so you sign onto an affordable plan that will keep you and your company covered.
4. Not planning for tax obligations.
Ah, taxes. You may have shuddered at the amount of taxes deducted from your paycheck at the desk job you left, but when you’re self-employed, you are fully responsible for your tax liability. You will have different state and federal tax obligations depending on your business’ size, location, and industry, but a good rule of thumb is to make estimated quarterly payments to the IRS to avoid facing a huge tax bill at the end of the fiscal year.
5. Forgetting an emergency fund.
No matter how well you plan, there will come a time when you encounter expenses you hadn’t anticipated. Whether you come up against a legal issue, your property was damaged or stolen, or you need a way to pay your employees during a series of slow months, an emergency fund can allow you to cover the costs and keep your business afloat. Business owners should save at least three months worth of expenses as a contingency fund.
Top tax software
South Carolina offers several options for filing and paying your taxes online. Filing electronically is still the fastest and easiest way to complete your return. What tax software is right for your business?
Virtual assistance: TurboTax
Overall: H&R Block