Congratulations on starting your own business! Owning your own company can be an extremely fun and exciting journey. However, regardless of whether you’re operating an LLC, partnership, or corporation, there is one thing, in particular, that could be the death of your business. It’s the biggest financial mistake new business owners make, and I’m going to help you avoid it.
Don’t Use Money You Don’t Have
When you first started your business, you probably had high hopes about making profits as quickly as possible. You knew you had to get everything you needed to be successful and put yourself in position to win. However, lines sometimes get crossed when we start confusing “wants” with “needs.”
You don’t NEED everything right away in order to start showing profits. In fact, if you can start your business lean, you’ll be better off in the long run. Businesses make their biggest financial mistake when they start spending money they don’t have. This could be by taking out loans with high-interest rates, or spending all available capital in the bank account — ultimately draining the pond and leaving you with nothing.
If you don’t have enough money coming in to replace what you’ve spent, you’re going to be financially backward, which could cause you to dissolve your business and give up your dream. You don’t need the most high-tech computers out there. You don’t need a 45,000-square-foot warehouse if 5,000 will do. You don’t need to buy the newest location on the block to use as your office…especially if your business doesn’t need clients or prospects to physically walk through a door. You don’t need the fanciest sign out in front of your business if there’s no need to draw foot-traffic (such as if you have an online business). Save your money and invest it back into your business on things that will help with your growth rather than wasting it on frivolous items.
If you don’t need to take out a small business loan to start your company, then DON’T! There’s nothing worse than starting a business with heavy debt before you even open your doors. Again, start lean if you can. Once you’re profitable and looking for exponential growth, then you can look to bring in investments or take out a loan. (Also remember that it will be extremely difficult to get investors or even a loan with zero business credit.)
BONUS: Keep Business and Personal Finances Separate
There’s another big business mistake new entrepreneurs make, and it’s something surprisingly many people fail to understand. When you open a new business, you need to separate those financial transactions from your personal ones from the start. Just because you already have a checking account at the bank does not mean you should be paying business expenses out of your personal account! Open up a new business account immediately to draw a clear line about what expenses are for your business and which ones are for you personally.
Skip the Pile of Receipts
When you mix business finances with personal finances, there’s one thing that will happen for sure: you’ll need a large bottle of Tylenol for the headache that’s about to ensue. Remember, even if you have an LLC and file everything under your personal 1040 for the year, you need to keep everything related to your business separate so you can include a Schedule C with your 1040 tax form.
Think for just a moment about how many personal expenses you already have, and how many additional transactions you’ll have for your business in a given year. Now, take all of those receipts and try to sort through them come tax time. It’s enough to drive you mad! So, take my advice and skip the second biggest mistake new business owners make too: Keep separate accounts and separate expense trackers to make your life easier in the long run.
Protect Your Personal Assets
Think about the liability benefits you’ll get from keeping personal accounts as well. If you’re paying business expenses out of your personal account and get sued, guess where the money from that judgment is coming from? You got it: your personal account (and assets). You need to “separate church and state” here to make sure there’s no overlap that could sway a judge’s opinion on how to settle any debt or lawsuits brought up against you. The “it will never happen to me” mindset could very easily ruin your personal and professional life if you take that gamble. So protect yourself and your personal assets — open a standalone business account.
Establish Credit for Your Business
As mentioned earlier, if you are in need of capital to fund an expansion of your business later, you’re going to need some sort of credit. The best way to build business credit is through a business bank account in the name of your actual business. Additionally, you can open a business credit card to charge all business-related purchases on. Not only will this help keep your business and personal expenses separated, but if you are paying any interest on large purchases, that interest is tax deductible (while the interest on your personal credit card it is not).
If you need help managing your business once you get up and running, the highly skilled staff at Incfile can keep your business in good standing. Additionally, come tax time, you can work with the Incfile staff, who can even prepare your business taxes on your behalf.