Introduction
The number of start-ups in India has grown seven-fold over the last decade, according to financial consultancy firm KPMG. With a slew of start-ups coming up every day, not every business survives the competitive market.
Every entrepreneur knows that they will have to take some calculated risks to help their business grow, but these risks may not pay off every time. Some mistakes are easy to overcome while other can lead to financial ruin. To help you avoid some of the most common errors business owners make, we have compiled a list of financial mistakes that every entrepreneur must avoid.
Mixing Personal and Business Accounts
The first thing every entrepreneur must do when setting up a new business is open a separate checking and saving account to keep track of the business revenue and expenditure.
While it may seem convenient to use the same account for both, your personal and business finances, it can create a false image of the financial situation of your business. It can give you an inflated view of the funds available and also make it difficult to ensure that you are not blowing through your budget.
Having separate personal and business accounts is necessary to set clear financial goals, meet tax obligations, calculate profits and balance accounts.
Not Having an Emergency Fund
The one thing most financial advisors can agree on is the importance of creating an emergency fund. Whether you are just starting or have been in business for a few years, a safety net is something that can help your business survive during hard times.
Irrespective of the amount of planning you do, there will always be unexpected expenses that your business incurs. A contingency fund will help you sail through a sudden financial crisis. A good estimate of the amount you should have in your emergency fund is about three months’ worth of business and personal expenses.
Making Unnecessary Purchases
With the start-up culture trend, businesses tend to have the best of everything, meanwhile it is necessary for every new entrepreneur to take a step back and take a good look at their shopping list. Everything from office space to the technology required to run the business can be acquired at lower rates with some advance planning and opting for alternatives that are more economical.
A larger office space away from the expensive business hubs, laptops that focus on functionality instead of branding and appearance, free or cheaper software and tools where possible and eliminating other frivolous expenses while setting up the office space can help you save a decent amount of money.
This is not to say that you should go for the cheapest option for all requirements. The money you save on other things can be spent on getting the best products available that are critical to the functioning of your business. Spending money on a good website or a premium spot at trade fairs can benefit your business greatly.
Not Setting a Budget
The most efficient way to control your finances is to set a budget. A budget will help you set the boundaries for how much you can spend on any given thing and gives you an idea of when you might have to over-extend yourself in case of a slow month.
Your budget must take into account your fixed monthly spending including operational and marketing spending, expected variable spending as well as emergency funds for unexpected expenditure. Without a clear budget you may end up racking up debt if you are short on cash in a crisis.
As a business owner, it is your responsibility to ensure the profitability of the business and setting a well-defined budget is the best way you can facilitate that.
Incurring Short Term or Credit Card Debt
Now that we have talked about the need for separate bank accounts for your business, let us also take a look at how to manage them. A number of business owners end up in short term debt due to the ease of spending that credit cards provide. It is very easy to charge everything on your business credit card and lose track of the expenses you’re incurring. While you can continue using the cards by paying the minimum amount required, the interest on the amount will continue mounting.
This is why it is imperative that you exercise discretion while using such lines of credit and avoid falling into a debt trap.
Pricing too high or too low
The aim of every business is to sell a product or service but pricing it right is necessary to gain new customers and retain your existing ones. The cost of production is generally greater during the initial stages and may force you to price your products much higher than the market average. This will hamper your business and may lead to stagnation.
On the other hand, pricing your products too low can cause immense losses if you are unable to meet your operating costs at the very least. If you have to increase the price of your products at a later stage, you might lose many of your early customers.
This is why it is necessary to do ample market research and set the price at the market average or even above it if you are selling a niche product.
Conclusion
Every entrepreneur makes mistakes but some errors can negatively affect your business in the long run. While it is easy to bounce back from minor financial setbacks, it can very difficult to resurrect your business if you fall into a debt trap or are unable to handle a financial emergency. This is why it is advisable to plan your budget well and constantly track your expenses to ensure the financial stability of your business.
