Business Finance: Avoid These Pitfalls

Business Finance: Avoid These Pitfalls

When people have never owned a business before it is easy for them to get carried away by the financial side of it and make some glaring errors. This is part of the reason that nearly 50% of businesses fail in their first year, and why another 50% of those left have ceased to trade before three years. Some of these businesses are underfinanced to start with, and then compound the problem by not being sensible with their money. It’s easily done, trust me. I learned a few hard business finance lessons in the beginning.

People starting new businesses have to be prepared to take risks and to work hard for long hours without much reward in the early days. Just look at some of the billionaire business people that started with very little and you will see that is was several years before they started to spend money of any significant amount. It is this that contributed to their huge success, and here are a few of the tips people like them have given when it comes to the finances of a new business.

Keep Business And Private Bank Accounts Separate

This can be a really important rule to follow, especially as your business starts to grow. Pay yourself a set amount and remember that you have to live off that. If money is building in the business finance account that is good because you will have the funds for further investment to make it grow even more.

It can be convenient to have everything paid from your business account but it can also be easy to lose track of just how much you are spending. This can lead to too much money disappearing and then when you have a business finance bill to pay you will not have the money.

As the business improves, you may be able to increase the amount you take as a wage, but don’t rush into that until you are sure the sales are consistent.

Do Not Spend Big Money On Equipment

It is only natural that you want to be working with the best equipment, but don’t rush out and buy new computers or anything else. Manage with what you have or buy used until the business has made some profits, and then you can invest some of those. You do not need everything at once either. It can be tempting to buy all new office furniture, for example, but you can buy a new desk one month and a new chair further down the line.

Some new business owners take on business finance leases and hire purchase agreements before they have made their first sale. Then the business takes longer to get off the ground than they hoped, but they still have to make those monthly payments. Often these agreements are for items they could have waited for, but once you have signed on the dotted line, you are liable for that debt whether your business succeeds or not.

There are some expenses that are very important such as the building of a user-friendly and engaging website. Things such as this should have priority if you want your business to succeed.

Don’t Make Large Personal Purchases

Making large personal purchases, such as a new car, can send your business under before it even starts.  Even with separate bank accounts one for business and one for personal matters, there may be occasions when you need to dip into your business funds, but that should never be to fund a large personal purchase.

The luxuries can come later when you have made some money, but in the meantime, manage with the car you have and your business will stand more chance of success.

There are times when a personal purchase in unavoidable, but then you need to be able to pay for it out of the money you take each month and not put an extra burden on the business bank account.

Don’t Forget The Tax Man

None of us like paying tax, but as someone once said ‘I would love a tax bill of a million pounds because think how much money I would have made to get that’. It is a fact of life that the bigger your profits are the bigger your tax will be. In the UK, it depends on whether you are a sole trader, a partnership or a limited company as to when your tax bill will be due, but it will be far better if you have saved for it.

Put some money into an account that pays you interest, so that your tax makes even more money for you. Some people invest it into premium bonds in the hope of a big win while it is waiting to be paid.

Because the laws change every year, it is best to use professionals to calculate and guide you in matters relating to tax.  For some professions, there are HMRC disclosure facilities if an error has been made, but for others, a mistake could be the trigger that starts an investigation into your affairs, and that is more likely to be avoided if a professional has dealt with tax matters on your behalf.

Small business owners have many tasks to do and this includes bookkeeping and accounts among them. You should consider outsourcing these jobs for several reasons. It will free more of your time, you will know they are being done correctly and outsourcing them is the cheapest way to access the expertise these type of tasks need. I wouldn’t be without my accountant!

Forget The Business Credit Cards

Business credit cards can seem a handy thing to have, but they can also cost you a lot of money. They can give you a false sense of security when you are buying things with them, but knock you for six when you see how much interest you are being charged.

Suddenly those office supplies you bought can double in price if you are not able to pay the full balance every month. As a new business you need to steer clear of as many debts as possible, and that includes business credit cards.

Business credit cards are just like any you may have personally. They are one of the most expensive ways of financing anything and you are better off without them.

Save For Emergencies

Get into the habit of saving a small amount each month. This will soon start to build and then you will have an emergency fund if a disaster happens. No one can predict a flood or fire for instance, or what if you have a power cut the breaks your computers. These things happen to businesses every day, and although you should have insurance to cover them, the payout will take a while to happen.

You need some money behind you so that you can be up and running again with as little delay as possible, and then when the insurance pays out you can replace what you have had to spend.

Enough to cover three months expenses seems to be the amount most business people aim to keep behind them, but anything is better than nothing.

Have A Budget For Your Business

You should have a budget for your business so that you know what the outgoings are going to be every month. This will make it easier to plan for and let you see if you have anything spare to spend or invest. If you can have a realistic prediction of your income, that will help you to plan your budget too. If the sales exceed your expectation, that is great, you just do not want the expenses to do the same.

The main part of your job is to steer your business to success, and you can only do that if you are aware of all the money that has to be paid out, and what is likely to come in.

Master Your Finances

It is far easier to lose money than to make it, and too simple to spend more than you have. No one would ever suggest that you do not need to raise some finance to help your business grow, either by a bank loan or from some other financial institution, but you should only do that if it is really needed. This all needs controlling though and learning to master your money is crucial if you do not want to face financial ruin.

Have a clear budget plan, steer away from unnecessary debt, save for unforeseen circumstances and keep a line between your own and the business finances, and you are well on the road to avoiding many of the mistakes that some new business owners make. With financial worries out of the way, you will be able to concentrate on growing your business instead of wondering how this bill or that bill will be paid. Putting all their efforts into the growth of the business is how people such as Bill Gates and Richard Branson became so successful, and there is no reason at all why you should not do the same. We will not all become billionaires as they have done, but for most people, making a good living from their own business is all they are after.

 

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