As you become a new business owner and put your personal finances on the line (70% of new startups are primarily funded by their owners), you want to try to avoid many common financial mistakes that young companies can make. It can be hard to focus on the boring parts of the business; however, these “boring” parts may be the difference between thriving and crashing.
- Don’t underestimate your expenses – If you have ever moved into a new apartment or house, you realize how many miscellaneous expenses there are and how easy it is to underestimate them. It is the same with a startup business. For instance, employee costs can quickly add up when you add in the employer portion of Social Security, Medicare, and unemployment insurance. Maybe you don’t need to rent an office right away. Can you work out of your home? Have you properly calculated shipping or mailing costs? Make sure to budget for legal and financial help that may save your business down the road.
- Keep enough cash on hand – Make sure you keep emergency funds on hand for the inevitable disaster that strikes. Running out of cash can be the death of startups. Also, secure financing for the future when growth occurs. Don’t rely on plastic (credit cards) that may have high interest rates that will put you into even more of a financial hole.
- Know your numbers – What do your sales have to be to break even? What are your fixed expenses versus your variable expenses? Fixed expenses include rent, utilities, and wages – any expenses that do not fluctuate with sales volume. Variable expenses may include the cost of materials, shipping, sales commissions – those expenses that do change with sales volume. As sales increase, so should profit margins.
- Hire a great accountant and attorney – Good advice is worth its weight in gold. It can be costly but may save many headaches in the future. Hire the best that you can afford and utilize their recommendations.
- Don’t commingle personal and business accounts – Your personal accounts should remain just that – personal. Have a business credit card and a business checking account so that you have an accurate recording of your Do not “dip your hand into the cookie jar”. If you are taking a draw or paying yourself a salary, properly expense it so that you can keep an accurate log of your business transactions and your accountant will have a proper accounting at tax time.
- Don’t be shy about showing a profit – Sometimes business startups “over-report” losses in an effort to minimize taxes and keep their costs down. Be careful about doing this year after year in a growing business. This could hurt you in the future when you may need to secure more financing from a bank or another source.
The financial aspect of a startup business is crucial to its success. Having a great product or idea by itself will not create a successful, growing company. Take the time to understand the nuances of the numbers associated with your business and your idea will thrive.
Barbara Trombley is an owner and financial planner with Trombley Associates in Wilbraham, MA. Trombley Associates provides independent financial services, including retirement planning, to a wide range of clients. Barbara received her undergraduate degree from Duke University and her MBA from New York University. She is also a CPA.
Photo courtesy of TaxRebate.org.uk