Financial Blunders That New Business Owners Often Make
Starting a new business is exhilarating, but the thrill of entrepreneurship often comes with a steep learning curve. For many first-time business owners, financial missteps can have lasting consequences.
Whether you’re bootstrapping a startup or launching with a robust investment, avoiding common financial mistakes can mean the difference between success and failure.
The following are some of the most common financial blunders, as well as tips for new entrepreneurs on how to build a solid financial foundation.
1. Underestimating Startup Costs
One of the most common mistakes you can make is right out of the gate — that is, underestimating how much money it costs to start a small business.
Entrepreneurs often assume they can operate on a shoestring budget, only to encounter unforeseen expenses such as equipment, software subscriptions, licensing fees and even legal services.
How to Avoid It:
- Create a detailed business plan that includes a comprehensive budget.
- Consult with experienced professionals or mentors who can provide insights into industry-specific costs.
- Add a 20% contingency fund to cover unexpected expenses.
2. Mixing Personal and Business Finances
It’s tempting to dip into personal funds to cover business shortfalls. However, this lack of separation can complicate bookkeeping, create tax issues and make it harder to secure business financing in the future.
How to Avoid It:
- Open separate bank accounts and credit cards for your business.
- Pay yourself a salary instead of pulling from the business account sporadically.
- Use accounting software to track expenses and ensure clear financial boundaries.
3. Overextending With Debt
Some new entrepreneurs rely on loans, credit cards or lines of credit to fund their ventures. Small business debt isn’t necessarily a bad thing, but overextending yourself can lead to unmanageable interest payments and financial stress.
How to Avoid It:
- Borrow only what you can reasonably repay based on your cash flow projections.
- Consider alternative funding sources like grants, investors or crowdfunding.
- Reevaluate debt regularly and prioritize repayment to reduce interest costs.
4. Ignoring Budgeting and Financial Planning
Operating without a budget is like driving without a GPS. Many new business owners either avoid budgeting altogether or create a budget but fail to follow it. This can lead to overspending and a lack of financial control.
How to Avoid It:
- Establish a realistic, detailed budget that accounts for both fixed and variable expenses.
- Review your budget monthly and adjust as necessary.
- Use financial planning tools to monitor your spending and set financial goals.
5. Pricing Products or Services Incorrectly
Pricing is both an art and a science — and struggling with either aspect can have dire consequences. New business owners often price their offerings too low to attract customers, only to realize later that they aren’t covering their costs.
How to Avoid It:
- Conduct market research to understand industry pricing norms.
- Factor in all costs, including overhead, when setting prices.
- Regularly reassess your pricing strategy to ensure profitability as your business evolves.
6. Not Planning for Growth
You shouldn’t take growth for granted. But many new business owners focus so much on surviving the startup phase that they fail to plan for long-term growth.
Thing is, without a growth strategy, businesses can stagnate or struggle to scale effectively.
How to Avoid It:
- Regularly update your business plan to include milestones and goals for growth.
- Invest in scalable systems and technology that can grow with your business.
- Set aside funds to reinvest in marketing, hiring or expansion opportunities.
7. Overlooking Taxes
Small business taxes are a major area of confusion for many entrepreneurs. From income taxes to payroll taxes to sales taxes to self-employment taxes, the requirements can be overwhelming.
But you can’t afford to be overwhelmed: Failing to pay taxes on time or underestimating tax liabilities can result in penalties and interest.
How to Avoid It:
- Hire a qualified accountant or tax advisor to help you understand your obligations.
- Set aside a percentage of your income (typically 25-30%) for taxes.
- Use accounting software to track deductible expenses and streamline tax filings.
Don’t Let Early Mistakes Handicap Your Business
You can’t avoid every possible mistake. But the more problems you can pilot your business around in its infancy, the better off it’ll be.
McManamon & Co.’s experts are well-versed in everything it takes to start and run a business. And our consulting team can help small businesses with preparing SBA loan packages, strategic planning, tax planning and much more.
Don’t let your small business get tripped up right out of the gate. Call us at 440.892.8900 or contact us online today.
Tags: McManamon, McManamon & Co., small business, small business accounting, small business banking, small business finances, small business taxes | Posted in McManamon & Co., small business, Small business finances, small business taxes