Pandemic or no pandemic, starting and maintaining a business comes with a number of financial challenges. In the UK market, according to fundsquire, 20% of start-ups fail in their first year, with 60% done within three. It’s statistics like these which hammer home the harsh reality of entrepreneurial life – that being, more often than not, a great idea is not enough.
Typically, that great idea needs to be supported by two key things at least – hard work and good financial management. Where the latter is concerned, there are countless financial hurdles for a business to trip over on the way up and even once established – and avoiding them is intrinsic to success.
With that in mind, here are five key financial mistakes every business owner should steer well clear from.
Not separating business and personal accounts
A business is nowhere without an understanding of its financials, and to have a grip on them you need to have a separate account for your business, no matter how big or small your operation is. It may sound quite confusing when you begin a business but it could be easy as you learn more about it. You could make use of CPM software platforms such as OneStream Software to help with anything financial related which includes planning, budgeting, and forecasting.
Too often, new business owners make the mistake of going for convenience over commitment to detail and assume a single account for all walks of life will do – at least initially. Go down this route and you’ll lose track of your business’s true financial health quickly, and potentially risk issues down the line including improper tax declarations and the accompanying penalties.
Not staying on top of cash flow
Atop the list of reasons for start up and SME failure is cash flow problems. Your cash flow is the life blood of your operation, and even if you’re currently in a good place financially, things can change very quickly if you’re not thinking ahead with your budgets, expenses and sales.
One thing to remember is that positive cash flow is not the same as profit – a business can be profitable on paper but not have the cash flow to pay for essential elements. Ensuring that positive cash flow, regardless of your P&L, should always be a focus.
Making large personal purchases
The last 18 months have shown that all the financial planning in the world can’t account for the economic challenges a business might face. Not matter how prepared you are and how much you think you’ve got things figured out, it’s likely that at some point in your business’s initial life cycle you’ll be overstretched financially, and potentially have to dip in to your personal funds.
While we’ve already talked on keeping business and personal accounts separate, utilising personal funds where necessary to keep your business afloat is something you may have to consider. If you are busy spending personal money on other luxuries because you consider it to be truly separate from your business life, then you could fall foul in a time of need.
Spending too much up front
It’s easy to get carried away when starting a new business. You want it to work, and of course you want to do everything possible to make it work, and there are undoubtedly some brave calls to be made financially. Within this sphere of thinking, one common mistake made is to overinvest in the business straight off the bat, and not focus that money on where it really needs to be.
Whether that’s buying unnecessarily expensive office equipment or going overboard on a marketing budget, it’s essential that you keep your investments in the business considered and carefully designated. In a working world where business owners are often criticised for being too tight fisted and not spending enough, you do also need to be cognisant of going too far the other way.
Not asking for help
It’s a big, scary business world out there, and you’re certainly not expected to know everything there is to know about running a successful operation. The important thing is to be aware of that when running your business and not try and go it alone on areas you have no knowledge or experience of.
Perhaps you need help with the accounting side, maybe you’re not sure where to take the business next in terms of investment? Whatever the issue is, knowing your limits in business is key, and knowing when to get help in from financial professionals will help you maximise the value within your operation.
With plenty of opportunity to succeed coming out of the pandemic, new business owners will be hoping their idea is the one that sticks. Behind every good idea, however, needs to be good financial management, and avoiding mistakes like those mentioned above will be just as important, if not more so, to any new business’s success.