Starting a successful business requires a good idea, startup funding, sound financial practices and a commitment from business leadership to do whatever it takes to adapt to changing market conditions. While thousands of people start a new business every year with the best of intentions and a willingness to work hard, Small Business Trends reports that only 18 percent succeed with 29 percent failing because they run out of money.
Interestingly, this is also true even for nonprofit businesses that depend on online donations and other fundraising. There’s no two ways about it – money is the fuel necessary to begin any business enterprise. That’s why preventable financial mistakes must be avoided at all costs.
Business professionals fail to monitor and manage cash flow
Cash flow is the lifeblood of any business. Cash needs to be available for operational expenses such as human resources, equipment, and office supplies at a minimum. A business startup requires even more money in the first few years to get established legally and financially. There are licenses to apply for and computer systems to buy in the first year. Inc. reports that cash flow is about more than how much money comes in and how much goes out; timing can be just as important.
Underestimating expenses causes serious cash shortages
When those first checks arrive to validate a new business, it is important to set aside enough money for immediate expenses and to also save for future unexpected outlays. For planning purposes, every possible expense must be considered. Serious problems arise when operating expenses go unpaid. If you’re unsure what to expect, it’s always a good idea to check how someone else did it. For example, did you know that the cost to open a bar usually starts at over 100,000$?
Just as important as a worthwhile business mission, fiscal responsibility is key for the stability and growth of any new business venture. Forbes recommends saving for down periods when the work is not as plentiful. Budgeting for seasonal up and down cycles is a necessity. Successful entrepreneurs recognize the importance of being frugal and saving for future lean times.
In an attempt to be thrifty, business owners often pay too little for qualified employees they need
Since talented and creative people are valuable assets for any company, hiring the best people available is of paramount importance. There is no substitute for bright employees who are devoted to corporate success. The human resource factor should never take a backseat to other corporate assets necessary for building a successful business. Far too many entrepreneurs expedite the interview process, tendering an offer to the first decent candidate that shows up instead of interviewing enough qualified candidates to meet the best and brightest available.
Overspending on unnecessary personal items can cause future cash shortages
When the money starts rolling in, some business owners feel the need to spend some of it on luxury cars and other conspicuous purchases. Self-discipline is a must when starting a new business. It is important for business owners to have personal money on hand in case an emergency arises. In the beginning when it is difficult for a new business to borrow capital from traditional sources, The Balance Small Business reports that entrepreneurs often find it necessary to provide personal funds for business expansion.
Mistakes are part of any new business startup. Those mistakes come with a price tag. Having a low personal overhead with savings available to access when problems arise can make all the difference between success and failure.
Entrepreneurs ignore profit margins at their own risk
Focusing on gross revenue figures is impractical if business owners aren’t also accounting for variable and fixed expenses. Expanding the company’s profit margin means increasing revenues and reducing business expenses. Prudent business leaders recognize the importance of setting goals to increase the bottom line instead of unnecessarily dwelling on revenue figures.
Entrepreneurs that commingle personal and business funds are at risk legally and financially
This mistake can cost new business owners considerable cash to pay tax fines and accountants who may have to spend precious time separating personal and business expenses for IRS reporting purposes. Not only does commingling funds cause problems with the IRS, it can also put a business owner at greater risk personally. When personal and business funds are commingled, then the corporate veil is pierced legally and can’t protect business owners from personal liability.
Entrepreneurs can create an enduring legacy if they practice sound financial judgment. Following the six tips above dramatically improves a new venture’s odds of success.
Video – What is a Startup?
All startups are new businesses but not all new businesses are startups. Do you know why? This Market Business News video explains.