Managing money is a mystery to many people. According to a recent Bankrate.com survey, just 37% of Americans have enough savings to pay for a $500 or $1,000 emergency. The other 63% do not have anything in savings and would have to resort to other measures like cutting back on spending and using a credit card in order to handle an emergency.
In business, money management is not that much better. Entrepreneurs who manage their own finances often make the same mistakes with their business finances as they do with their personal finances. Sometimes the mistakes are even worse. Here is a list of 8 money mistakes that entrepreneurs often make when running their business.
1. Not Having a Solid Financial Plan
Many up and coming entrepreneurs get too carried away with day to day business that they forget to take a step back and assess their business’s overall financial health. Developing a clear, detailed financial plan from the beginning is an absolute must. A solid financial plan is the foundation of every successful business as it helps entrepreneurs keep track on finance and aids in managing investments and expenses. A good financial ecosystem from the get-go, may not guarantee growth and expansion, but it is certainly a necessity.
2. Underestimating Expenses
Not even a good, well thought-out financial plan can cover all expenses. Seasoned entrepreneurs refer to these expenses as “miscellaneous expenses” – expenses that you never imagined and that were never a part of your initial financial plan. These expenses are unexpected, a lot bigger than you imagine them to be and will definitely come. Most entrepreneurs make the mistake of underestimating these unconventional expenses, even though they can certainly produce a powerful financial blow and jeopardize your business. Always count on miscellaneous expenses and include them in your financial plan.
3. Not Using Professional Services
Not using professional services is definitely one of the most common entrepreneurs money mistakes. A qualified bookkeeper or an accountant save time and money both, even though it may not seem that way at the first glance. Many up and coming entrepreneurs focus on short-term investments and fail to look at the bigger picture.
In the long run, hiring an experienced, competent professional certainly pays off since this creates more time and maneuver space for entrepreneurs to focus on growing and expanding their business, without losing time and nerves on tedious and time-consuming tasks, such as bookkeeping and tax returns.
4. Outsourcing Too Much
Outsourcing can work great and provide great return of investment for small businesses. However, young entrepreneurs often get carried away and outsource way too much. This is another one of those entrepreneurs money mistakes that often go under the radar, since outsourcing seems to be the “in” thing to do at the moment. The bottom line is this: do not spend money on outsourcing until you can actually afford it.
Do even the simplest, most mundane tasks yourself. This will save money and help your business grow faster. On top of that, gaining experience and insight into each and every aspect of your business can prove to be incredibly valuable in the future, so don’t be afraid to deal with what you’re not used to, instead of outsourcing work you’re not too comfortable with.
5. Focusing on Style Over Substance
Renting an office too soon, buying expensive furniture and equipment are one of the more common entrepreneurs money mistakes, especially in certain industries in which being presentable is the norm. It’s much better to take things slow, especially in the beginning. Spending money on things you don’t really need yet, such as expensive office furniture is not an investment – it is, more commonly, a waste of money.
Focus on what matters the most – substance and not style. If things go well, there is always time to buy that wonderful office furniture package you have your eye on, until then, it’s better to concentrate on investing intelligently and making money. In the end, your clients and customers care a lot more about the services or product you’re offering than about anything else.
6. Not Thinking Before Investing
Everyone expects business owners to test and think before making an investment, yet reckless, not based on empirical proof investments are a very prevalent entrepreneurial money mistake. No matter how much you like a certain product and stand behind it, there might not be a market for it.
It is always wise to analyze, think and test the market to get some feedback before investing your time and money into something that may not even pay off in the long run. Having courage and taking risks is admirable, but being careful and taking calculated risks is what makes money.
7. Mixing Business and Personal Finances
New entrepreneurs often fail to see the importance of having their business and personal finances separated. Perhaps they think and act like it is all their own money, which it sometimes is, but not separating finances can cause a lot of financial confusion and, in the end, create a monetary mess that can be incredibly hard to break out of. Set up different bank accounts, hire professionals to help you through the process of setting up and separating your finances, if you don’t feel like you would do a good job.
8. Not Keeping Backup Cash
There are many that have the philosophy that all cash in the business should be reinvested. I have even heard that entrepreneurs should not put money into retirement accounts (we’ll discuss that in a second). But the very idea boggles my mind for multiple reasons.
First, it is a short sighted view that just because the sun is shining now, it will always shine. When there is a crisis, it is much better to utilize your own cash rather than borrowing. When a business has emergency cash in reserves, it is better equipped to survive an economic downturn. Borrowing when you are in trouble is a bad idea. Instead, leverage credit to grow the business. As entrepreneurs, we are good at getting ourselves out of holes. But sometimes, it is just easier to sidestep the hole.
Another reason it is a important for your business to have backup cash is for fast expansion. Getting funding for expansion can sometimes take longer than we’d like. Whether it is from Angels or VC’s it is usually not a speedy process. Slowly building cash reserves, gives you the freedom to manage your debt the right way by borrowing only what you need and then using your own cash for expansion.