Startup founders have a valuable skill in crafting a unique idea and turning it into a business. They are fearless visionaries who know what they want to achieve and identify the steps to get there. These leaders can perfectly use their instincts and analytical cleverness to make the best decisions for their company. However, even the best fall down sometimes. Here are some startup financial mistakes that you should avoid:
4 Financial Mistakes Startup Owners Make
1. Using Personal Bank Accounts for Business Purposes
It’s not enough to know the bank identifier number (BIN) register or Bin List and begin collecting revenue from your customers. You need to understand the importance of keeping your personal and business finances separate.
Using one for two aspects of your life may be convenient. However, you’re making it difficult for you to do accounting on your startup and plan for quarterly tax estimates.
These are the reasons why you should not combine your personal and business funds:
Sure, you’re saving paper from all the documents that you won’t need to file when using one account for personal and business expenses.
But, you’re giving off the wrong impression to your suppliers and clients. It also makes your venture seem like just a hobby for people you’ll be interacting with, and they may not take your startup seriously.
b) Tax Deductions
If you don’t have a clear designation for your income and deductions, the Internal Revenue Service (IRS) can give you a hard time with tax cuts.
You won’t be able to claim your business expenses as deductions since you can’t prove that they were used for startup purposes. Also, the IRS will most likely audit your company and deny losses if the distinction between your personal and business accounts isn’t clear.
2. Neglecting to Forecast Your Burn Rate
Your startup’s burn rate pertains to the amount of capital you consume each month to operate your business. Neglecting to make educated and well-informed forecasts of your burn rate can seriously hinder your growth. You’ll also be having a difficult time in reaching your goals before your money runs out.
There are two burn rates involved in a startup business:
a) Gross Burn Rate
This figure is your company’s operating expenses. You calculate this by adding together all of your startup’s expenditures like rent, utility bills, salaries, and other costs in a month.
b) Net Burn Rate
This one refers to the rate at which your enterprise is losing money. You calculate it by subtracting the operating expenses from the revenue. It should show you how much cash you need to continue operations until you earn a return on investment (ROI).
3. Expanding Too Quickly
Some startups are received so well by consumers that the demand for their products and services grow on a massive scale in just a few weeks or months. This causes a lot of problems with staffing. Hiring too many people at once can drain your funds with the on-boarding costs such as salary and benefits.
Other costs you need to consider are:
Transferring to another office and buying more equipment as well as supplies can drain your coffers.
Expanding too fast without thinking about future repercussions can affect your workforce’s morale. If you’re not earning a lot, but you hire too many employees, you have to let some people go when the demand for your product plateaus. This will have a negative impact on your employees and give them a reason to doubt your credibility.
You also need to reflect on the impression that you impart to investors when you lay off some people from your team. It shows that you aren’t able to create educated and well-informed projections to protect your company.
4. Spending Money You Haven’t Earned Yet
Often, business owners fall into the trap of making extravagant purchases with the belief that they’ll be able to pay off the bills with the revenue they will be getting from their startup. What’s worse is they incur a massive credit card debt that will keep them financially challenged even before their venture flies off the ground.
Always exhibit prudence and mindfulness with personal purchases while your business is still growing because you never know when you’ll have emergency expenses.
Being smart about money is a crucial skill for startup founders. You should stay on top of your finances and know where your money is going. Every expense made during the critical beginning stage of your business should be for its growth and development. It should also facilitate the inflow of revenue to your bank account.
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Author: Sarah Morris