The Biggest Financial Mistakes New Businesses Make

Starting a new business is a delicate thing. There is any number of things that can bring your business to a grinding halt, forcing you to close your doors. In fact, within one year of opening around a third of new businesses fail. Within three years of opening, that number goes up above 50%.

In some cases, the factors that shut down your business are out of your control. Rapid changes to your market or supply chain problems aren’t always something you can recover from. However, there are some serious financial mistakes you can make when starting a new business that will cause you serious trouble.

Here’s a look at some of the biggest financial mistakes made when starting a new business:

Not having a solid business plan. Some small business owners are under the false impression that a business plan is only useful if you want to get a bank loan or if you’re trying to get investors. That’s simply not the case. Understanding your production costs, your potential marketplace, and looking at a realistic projection of how your business will do over the next several years is a tremendous benefit to any business, regardless of whether you’re trying to raise capital or not. A good business plan helps keep you on track during those critical early days of starting a new business.

Not paying payroll taxes on time. Once you have employees, you become a collection agent for the IRS. This is a major responsibility and a dangerous liability if you’re not careful. When you hire an employee, you’re agreeing to help them pay their taxes. What often happens with new businesses is that, even though payroll checks are cut and list the withholding taxes for employees, the funds aren’t set aside in a separate operating account. The payroll tax funds stay in the business’ general account. Eventually, you can lose track of your liability. You wind up paying them late, or not being able to pay them when the time comes. As small businesses rarely have as much cash on hand as they’d like, you can wind up facing penalties and interest on your payroll tax obligations. The best way to solve this issue is to keep payroll taxes in a separate operating account, and not let those funds get mixed in with your business’ general funds when starting a new business.

Hiring before you have revenue. Having a contract or a promise of revenue isn’t the same as having revenue. Until you’ve actually got money in the bank, you don’t have it – regardless of what accounting method you’re using. Depending on something you don’t yet have and hiring employees based on that is a dangerous game, and it’s one that can shut a new business down completely if it goes wrong.

Borrowing because you can. Just because a bank has decided that you’re a worthy credit risk doesn’t mean you should borrow. If you need $10,000 for starting a new business but the bank offers you $20,000, stick with what you actually need. The bank is interested in making as much money in interest from your business they can. If they’re willing to loan you money it’s because they believe you’re a good risk, but it doesn’t mean you should take it. Borrowing adds a burden and stress to your fledgling business that you don’t need.

Low pricing. Most new small businesses aren’t out there to compete for the value buyer. You’re there to offer something of quality. In a smaller business it’s best to sell fewer units or fewer services at a higher price than it is to sell many at a lower price. Unfortunately, many new business owners tend to undervalue their own products or services and wind up making much less than they should be making.

A single source of revenue. Getting that one huge client can be a wonderful boon when starting a new business, but it’s not a valid long-term business strategy. You’ve got to have a diverse client base. In an ideal world, you’ll have several large clients such that, should one fold or simply stop giving you new orders, you’ll still be all right.

The success of your small business depends, to a large degree, on your ability to avoid these financial mistakes. Make these early decisions carefully; a dollar saved during the first year of starting a new business can mean 10 dollars the next year and the year after that.

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