Financial mistakes that destroy small businesses in the first year
The first year of owning a business is often the most challenging. Many mistakes can spell doom, from not spending enough to using credit cards for financing.
How concerned should you be? According to the US Bureau of Labor Statistics, about one in five businesses goes under during their first year. The reasons for it vary by industry, but they’ll often involve major financial mistakes.
Which Financial Mistakes Should You Avoid?
Managing the finances of a fledgling business involves a lot of moving parts. Here are five common financial problems these businesses may encounter.
1. Leasing Far More Space Than You Need
When starting a business, it’s tempting to lease more room than you need in hopes you’ll expand quickly. Your landlord will often try to push you in that direction by offering benefits like reduced rent, but this is rarely worth it.
It’s best to lease slightly more space than you need. If you’re in a business park, you may be able to move to a larger area at no extra charge when you need it.
2. Not Spending Enough
Spending too little can create just as many issues as spending too much. Splashy extras can wait until you’ve made it, but there are certain expenses that can set you on a faster trajectory to success. These include:
- Smart marketing
- Superb customer service
- Competitive employee salaries
3. Financing With a Credit Card
At some point, every business owner will need more money than they have on hand. If so, they may use their credit card to make up the difference. However, the interest rates on credit cards are high enough to make this a poor deal.
Instead, look into setting up a business line of credit at good terms. This requires some planning, but it will leave your business finances in better shape.
4. Not Having a Strict Budget
One of the biggest business mistakes you can make is not having a clear financial plan. Ideally, you would come up with a list of staged budgets based on where your business currently stands. The budget framework should include:
- Seed stage
- Launch stage
- Growth stage
- Expansion stage
- Maturity stage
5. Not Paying Your Quarterlies
Once a quarter, you can estimate your annual tax burden and pay it in advance. Doing so allows you to avoid hefty penalties. Depending on where you live, this may even be a necessity for local and state taxes.
Don’t want to track your quarterlies on top of everything else you need to do? You can always outsource this task to reputable Tempe Arizona bookkeeping services.
What to Do After the First Year?
Even once your business survives the first year, there are many money mistakes you’ll need to avoid. Here are some issues to keep in the back of your mind:
- Increasing your salary too soon
- Scaling back on marketing before achieving saturation
- Not saving enough aside for your first big expansion
- Not holding a second venture capital round
This Is How to Avoid Money Troubles
As you can see, financial mistakes come in many forms. The best way to avoid them is to be aware of them at all times and work toward staying ahead of the curve. The above guide can help you make that happen!
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