Starting a company for the first time can be a scary endeavor. After all, it involves your career, your dreams, and possibly your financial wellbeing. Mistakes will happen, and that's okay, but this article's goal is to help protect you from making common financial mistakes. Specifically, common financial mistakes that are often too big to recover from.
Eleanor Roosevelt said, "Learn from the mistakes of others. You can't live long enough to make them all yourself." In other words, you don't have to commit a mistake to learn from it.
We compiled a list of wrong things most people do when starting a company with this in mind.
Hiring before having revenue
New businesses will often operate under contracts or the promise of revenue before they have any real sum in the bank. Some businesses will take this promised revenue into account when planning their hires and make payment offers they may not be ready to fulfill. As you can imagine, this is an invitation to serious trouble that may haunt you for a long time. So when hiring, do it with the money you have and not the money you might get.
This will not only protect you from promising to pay people money you don't have, but it will also protect employees. Telling someone their job is secure when it isn't will turn your advocates into enemies.
Instead of promising a salary or bonus, you may want to try giving your employees a profit-sharing option or an hourly wage with a commission. That way, they are motivated to help the company succeed, but you aren't over-promising.
Borrowing Money You Don't Need
Although a money loan may be necessary sometimes, just because a bank is offering you money doesn't mean you should accept it. As the experts over at OinkMoney put it: "the bank is in business to collect interest and not to optimize your financial performance."
That is to say, the bank's only concern is earning money through loan interest, so they will always keep an eye out on the market to send offers. Your business, however, may not have the foundation necessary to deal with loan interest yet, so it's best to avoid it.
If you're considering a loan to start or scale your business, make sure to consult with peers and trusted advisors, not just the bank. While the bank will make sure you can afford the payments, they won't necessarily make sure it's the best option for you.
Something else to consider is your business type. A Sole Proprietorship will leave you personally liable for debts, and you may lose your home or car if you can't pay the bank. Alternatively, a Limited Liability Corporation will protect you from any company debts.
Not Paying Payroll Taxes on Time
Whenever you pay your employees, you as the business owner have to collect a portion of that money to pay the taxes. Essentially, as you hand out their paycheck, you also have to act as the state's collection agent.
The common mistake lies when the employer cuts payroll checks but does not set aside the correct payroll liability.
This results in the employer eventually losing track of the liability, leading to severe penalties and interest being thrust on the company.
The best way to avoid this is by running two operating accounts, one exclusively for taxes and liability and the other for general operating expenses.
Placing Prices Too Low or Too High
Despite the law of supply and demand and "lower prices lead to more sales," this strategy isn't foolproof. We break down pricing in-depth in our article on Return on Investment, but here is a quick summary.
If you price your products or services too high, you'll miss out on customers and may not sell enough to be profitable. However, if your prices are too low, you could have trouble making enough on each sale.
You'll need to find a happy medium to be successful.
Permitting accounts receivable.
In general, it's an awful idea to offer credit terms for your customers without a really good reason. You are a product and/or service provider, not a bank, so you will not need to deal in credit most of the time.
You can't hire more staff or buy materials when customers owe you money. It also takes time and resources to collect on customer debts.
You don't want to be in a situation where you are bleeding products or operating expenses because you can't collect on those receivables, so it's best to avoid them altogether.
Only Having One Source of Revenue
Have you ever seen a company that relies on a single customer or marketing avenue only to go out of business when something changes?
You want to fill your lake from multiple streams. Algorithms change, customer behavior changes, and businesses have to adapt.
While you may start with one marketing strategy or a single customer, you'll want to keep looking for more avenues.
The best way to look at this is to see your revenue as a portfolio where you want to have an assortment of investments. Now, it's to be expected that when starting, you'll have your hands full with the few clients you've already got, but expanding these sources of money is something you should always have in mind.
Hiring Too Much Overhead Too Soon
When hiring employees for your new business, you want to ensure that every new hire positively impacts your business financially. Hiring employees is much more expensive than making workflows more efficient and scalable.
This is a mistake that startups make far too often. They will over hire in their sales departments without perfecting their customer service or products. They spend too much on marketing and sales salaries while their customer retention goes down. All of a sudden, they are bleeding money and lay off employees.
Hire smart. Make sure that every hire is going to make a direct impact on your company.
Not Separating Personal And Professional Finances
When you start your business and get your first clients, you want to keep track of every penny coming and going from your enterprise, which will be hard if it gets mixed up with your Netflix subscription.
It doesn't have to be a fully operational business account either. Sometimes a checking account for operating business-related transactions is more than enough.
Doing this will enable you to keep a detailed business ledger that will do wonders when tracking growth or doing your taxes without any pollution from your grocery bills and rent.
In the introduction to this article, we mentioned that mistakes were almost a guarantee for people starting a business for the first time, and we picked the word "almost" for a good reason.
However, if you hire the expertise of Small Business Mentor, the number of mistakes you would typically commit when administering your new business is significantly diminished. After all, that's why we are here!