Starting a Business in 2022? Avoid these common financial mistakes
- While new entrepreneurs are setting aside a portion of their income for overhead costs, employee salary, and inventory management, one very alarming financial mistake is failing to prepare for emergencies.
- Not getting the right talent for critical positions will cost money. While small businesses need to get someone to fill in empty roles as soon as possible, it’s more important to sift through pools of talent until you find someone who’s most suitable for the job.
- One common financial mistake for new entrepreneurs is incurring more debt without a clear strategy on how to pay them off.
It’s no surprise that first-time entrepreneurs are more prone to making financial mistakes as they navigate the ins and outs of running their first business in 2022. They have no past experiences to reference. We want to help with that.
In this article, we’ve gone ahead and compiled some of the most common financial mistakes that new entrepreneurs tend to make. We hope that by identifying these potential financial setbacks, we can help you to avoid them as you build and grow your business in 2022.
Here are the most common financial mistakes you need to avoid in 2022
1. Failure to save for emergencies
Most new bootstrapped companies use their funds for immediate needs – marketing to more customers, developing new products, or hiring more staff. What they too often fail to do is save some of this capital for unforeseen expenses that could curtail their operations, or in severe cases, shut the business down for good.
Things like natural disasters or equipment breakdowns could arise at any moment and smart business owners want to be prepared.
Take the coronavirus as the most recent example of how an unforeseen emergency can completely upend a business. No one could have predicted the impact it would have on the economy, but businesses with a financial nest egg saved for emergencies at least had a money cushion to fall back on.
How to resolve this: As entrepreneurs take into account their overhead costs such as payroll, utilities, and rent, they also need to allocate separate funds for emergencies. Consider opening a bank account that’s dedicated solely to unforeseen circumstances so the company has backup funds available during the most vulnerable times.
2. Combining personal and business accounts
For many entrepreneurs who bootstrapped their business, it may be tempting to continue allocating personal finances to boost operations. However, this is actually one of the most common money mistakes first-time business owners make.
One of the most important reasons why business owners should keep their personal and business finances separate is tax management. It’s easier to track, manage and comply with tax requirements when the company has its own business account, separate from what the entrepreneur files annually.
When it comes to business taxes, every record counts. From official receipts to bank statements, company owners or the accountants they entrust should be able to submit timely and accurate financial information.
Most of the time, small business owners hire a tax accountant to utilize money-saving strategies and churn out tax returns for the business.
If there’s no clear distinction between personal and company finances, it will be more difficult to assess which expenses are business-related and which ones are not. Business owners won’t see the general overview of the business’ expenses and gross sales, which are critical to making sound financial decisions.
How to resolve this: Keep your business finances separate from your personal finances. With regards to the business, you should stay hypervigilant in recording every business-related transaction and be as transparent as possible with your expenses.
The more thorough you are in your record-keeping, the more effective your books will be in presenting a clear picture of the company’s financial health. This will help with financial decision-making and budget creation moving forward.
Plus, when tax season comes, it will be much easier to file, saving you time and stress.
3. No clear monthly or annual goal
A business without goals is like a race with no finish line. Goals help to steer the company so you aren’t operating aimlessly and without direction. Furthermore, when a team shares a goal and vision, it creates comradery and motivation to achieve it.
Goals also help to measure growth. Entrepreneurs should have well-thought-out sales targets each month. If the team continues to meet or exceed the goal, it may be time to expand and hire more team members.
On the other hand, if the team fails to meet these goals, business owners know they have a problem that needs to be addressed. Annual targets provide a bigger picture look at the company’s progress, or lack thereof, and help with budget planning and solution-oriented operational changes.
How to resolve this: Put the time and effort in to create a comprehensive budget that outlines all your different business functions – from marketing and operations to payroll and employee benefits – and your specific goals for each.
If this is your first budget, see what resources you have at your disposal to help craft it. Do you have people in your network who work in a similar industry who can provide insight? Are there budget classes you can take?
The more exhaustive your budget the better. Your current budget will help you to plan the following year’s budget because you now have an idea of where to improve. Without a clear budget in place, you won’t be able to effectively monitor your cash flow or measure when you’re profitable enough for expansion.
4. Incurring more debts
As the saying goes, you shouldn’t count your chickens before they hatch. There’s never been truer advice for entrepreneurs who incur more debts than they’re able to pay. It’s common for businesses to incur debts while they’re still in their infancy stage. In fact, many entrepreneurs planning to scale their businesses up find it a more realistic strategy to acquire debt.
Small and medium enterprises (SMEs) who want to increase their working capital to hire new people, ramp up goods or purchase new equipment may look at loans as a great long-term investment to finance these needs.
The problem is that for new business owners, obtaining loans is really a gamble since you aren’t sure how well your business will actually perform. You may end up acquiring debt that exceeds your profits. Now you’re in a situation where you have repayments that you aren’t able to make which will certainly yield a negative impact on the business.
How to resolve this: Before seeking additional financial aid, it’s important to thoroughly outline what the new debt is going to be used for. Will it be allocated for repayments of previous loans? Will it be used to relocate the branch to a city with more local traffic? Make sure to plan everything and see if the business really needs additional funding.
5. No proper planning for expenditures
Entrepreneurs who run their business online usually don’t allocate a portion of their sales for expenditures. They pay for utilities, rent and other miscellaneous expenses using the money from their personal pockets.
However, these resources are essentially used to keep the business running, and it’s only rational to add overhead costs as operational expenses.
On top of that, first-time entrepreneurs also need to plan for future expenditures necessary to boost company performance or build the brand on social media. Marketing costs like paid ads or promotional items need to be carefully taken into account to monitor the business’s overall cash flow.
How to resolve this: Create a separate budget for overhead expenses and make sure that you have more than enough margin to cover for it. Don’t forget to categorize other costs for delivering services, improving product packaging, or price adjustments in raw materials.
6. Not hiring the right talent
Chances are, brand new entrepreneurs have a ton on their plate. In some instances, they may be the only employee their company has. When it comes to hiring and recruiting talent, they may not have the time or financial resources to implement and carry out a stringent application process.
The problem here is that finding the right people can be costly, however, investing in the wrong people can be even more costly. According to the Society for Human Resource Management (SHRM), a salaried employee’s average replacement cost is estimated to be six to nine months’ worth of salary.
That means that if the employee is earning $60,000 annually, it could cost between $30,000 to $45,000 in recruiting and training their replacement.
How to resolve this: Take time to screen pools of candidates before hiring too quickly. Set a reasonable budget for a role that requires expertise. Entrepreneurs who have a position to fill but don’t have the time to interview candidates should seek the help of headhunters to handle the recruitment process for them.
7. Mismanaged inventory
Not all businesses have inventory to keep track of, but those that do are vulnerable to making one of the biggest financial mistakes: overspending until they are no longer able to pay off their debt.
Proper inventory management means knowing when to restock raw materials. Too early and you risk surplus which could lead to spoilage if the goods are perishable or obsolescence; too late and you risk gaps in cash flow and disappointing customers.
New entrepreneurs may get overexcited to stock their warehouses or shelves with their products before they actually have the established customer base to buy them. The longer inventory stays sitting in storage, the more it will cost them.
How to resolve this: Effective inventory management can save companies a lot of money and improve their cash flow. Entrepreneurs can set a minimum stock level for each inventory and replenish them before they’re sold out. They can also implement the FIFO method (first in, first out) to sell the oldest stocks first and maintain product freshness.
Running a business for the first time is difficult, especially when the team is lean or only one person is doing everything. However, keeping in mind these financial mistakes will allow new entrepreneurs to find ways to save money and other resources.
As you plan your strategies for 2022, make it a point to prioritize making sound financial decisions.