Common Financial Mistakes Startups (and even Existing Businesses) Make that can Cost them Big
You have a great idea. You’ve done your research and know your product or service has a place in the economy. Soon folks will be beating a path to your door. Starting a business from scratch is a daunting task. It takes grit and determination to walk this path, but you’ve got this. You have sorted out your suppliers, product or service offerings, online presence vs brick and mortar, marketing and many other important aspects. Brimming with enthusiasm, you are ready to go!
Or are you? Often entrepreneurs overlook some key financial components that can cost them big down the road. If you are thinking of starting a business, or even if your business is already operating, take a few minutes to review these common financial mistakes you should avoid.
Failing to establish a banking relationship early on
You opened an account at your local bank, but have you established a relationship with a business banker? Maybe you don’t need a loan to start your business, but you may need one in the future. There is always the unexpected, such as the pandemic this year, that makes this relationship key. Small businesses who did not already have banking relationships established ended up at the bottom of the list as business owners rushed to get their applications submitted before the funds ran out. Being proactive in fostering a relationship will not only avoid delays during the unexpected but also facilitate timeliness for future projects such as expanding operations or purchasing property or equipment.
Failing to understand the tax treatment of startup costs
As a general rule, the IRS only allows you to take an opening year deduction on $5,000 of startup expenses. If you spend more than $50,000 the amount deductible in the opening year is even less. The remaining amount spent must be amortized over 15 years. That means if you spend $30,000 up front, you get a $5,000 deduction this year and a $1,667 deduction per year for the next 15 years.
Startup costs are your pre-opening expenses (not to be confused with asset purchases which are different). Startup costs are costs that could be deducted as business expenses if incurred by an active business and are incurred before you open your doors or offer your services to the public. These include, but are not limited to, consulting fees, advertising, employee training, utilities, rents paid, supplies, etc. The takeaway here is not to stock up or pay expenses in advance if it isn’t necessary.
Failing to factor in the cost of your time
You’ve calculated the costs to deliver your product or services. You know the cost of ingredients or components for your product, and the cost of software, memberships or subscriptions needed to deliver your services. You can make a profit, but what about your time? You know you will be spending a lot of time, but have you included the costs for your time? Maybe you don’t need to take money out for yourself now, but If you don’t factor that in from the beginning then someday when you need to hire employees you may not have enough profit built into your prices. Do it now to avoid losing money in the future and the need for a considerable price increase which could damage your reputation.
Failing to have a business plan and forecast
Every business needs a written business plan. Documenting your goals, budgets, marketing and sales strategies reinforces the connection between starting a business and growing it. Studies have found that companies that have a plan grow 30% faster and are more successful than those that do not have a plan. Going through this process formally with a professional will also ensure that you consider the things you might not know. Forecasting your cash flow and financials as part of your business plan will help you to objectively consider the feasibility of the business you want to start as well as help you to understand your break-even point and future cash needs, obtain funding when needed and track milestones. Having a basic plan as a startup is generally okay. As you begin to better understand your product or service and customers you can build in more detailed strategies.
Failing to hire the right professionals
Entrepreneurs often think they should take on everything possible to keep costs down. Unfortunately, they do not always understand the true cost involved in doing this. Hours spent learning a new task to save on a one-time project is counterproductive. Taking on tasks that are outside their expertise can result in a false sense of security that everything is under control. Accept that you don’t know what you don’t know and seek out help.
Some of the questions to ask yourself….What are the best social media avenues for your type of business? Where will you get the best return? When you need to hire staff what does that look like? Are they an independent contractor or an employee? What are the rules for hiring and paying employees? Do you need to pay sales taxes and to whom? What is your income tax strategy and how does your personal and business income intersect? Do you have a well-defined roadmap for achieving your personal financial goals while dumping money, time and energy into your startup? Mistakes or missed deadlines in these areas can have disastrous financial consequences. Bringing on the right professionals will have you navigating these complicated waters smoothly.
Failing to be fiscally conservative
A big office, fancy furnishings, expensive lunches and hiring staff makes you feel like a “real” business. It adds to the excitement, and why not? You are very optimistic about the future. However, spending too much too soon will bleed you dry before you can get on your feet. Be objective about the economics of your endeavor. (Hint: having the business plan and help of a professional as noted above will help keep you in check.) Be fiscally conservative and start small. Work from home if possible, avoid the temptation of designer furnishings and take care of both the basic and higher-level operational work until you grow enough to support hiring employees.
