The first few years in business can be challenging for many reasons, including money. It may take a while to learn about your industry’s business cycle for instance, or to figure out which promotions will bring in reliable income, or how to budget, and so on. Many small businesses go out of business early in the game because of such money issues and money mistakes. Learning how to deal with the finances of your business is a new – and critical – skill that you must master if you are to become an established, long-term business and a successful business owner.
Here are the five most common money mistakes new entrepreneurs make and how to avoid them:
Mistake #5: Investing in marketing without a plan. Back in the day when I was still practicing law full time, I had a client with a big problem. He had created a new, improved back support. Ergonomic, comfortable and affordable, it really was a “better mousetrap.” So my client raised some money, hired some friends, created a partnership, and away they went.
One day, the VP of Marketing got an idea – if they advertised in one particular national magazine, their sales would go through the roof. The partners didn’t like it, but the VP was adamant. One day, on his own, he signed a contract for a $60,000 full-page ad.
That one decision almost put them out of business.
The problem was that the idea had no merit standing alone. Sure, it might have worked as part of an overall marketing strategy, with different elements that supported the ad, but that wasn’t the case. The moral of the story is that you need to create an overall marketing strategy before you sink any of your precious capital into one particular idea.
Mistake #4: Hiring people you don’t need. Many entrepreneurs will hire staff they can’t afford and don’t need because they think it’s necessary in order to look successful. That’s a big mistake. Labor costs can cripple any business, especially a new business.
But, that said, there are ways to bring in the help you need, affordably:
- First, if you really need an assistant, hire a virtual assistant and only contract them for specific tasks.
- You should also consider using independent contractors for projects rather than direct hires. You can always go back and offer a job to someone you used as a contractor if he or she was truly spectacular and if your revenue can support their salary.
- Along the same lines, a recent trend in business is to hire someone full-time as a temp employee, on a trial basis. If the employee passes the temp test, then you can bring them on on a more permanent basis.
Mistake #3: Not hiring an accountant. Most entrepreneurs stay away from even consulting with an accountant in the beginning because of the cost. This is the one area where you should not be cheap. Having an accountant on board will help make sure that the books are set up properly and that you meet all of your tax obligations.
Additionally, your accountant can help set up your accounting software system, such as QuickBooks. He or she can also give you some pointers about how to best use the software. Thereafter, because most software is now stored in the cloud, you can share your books online with your accountant, thus saving you time and money.
Hiring an accountant doesn’t cost, it pays.
Mistake #2: Spending too much on overhead. One of the first pieces of advice I ever got when starting my first business was, “keep your overhead low.” It remains one of the best pieces of advice too, even now. For instance, don’t rush to rent office space or equipment that you can’t afford as it will do nothing more than create a strain on your budget. A shared office (like Regus, for example) will still give you a great space, with affordable access to assistance and equipment.
And the No. 1 mistake new entrepreneurs make too often is . . .
Mistake #1: Not having a budget. Mistake #2, high overhead, comes from Mistake #1, not having a budget. The problem for many people is that they start a business without much more than a lot of enthusiasm and a strategy like, “come up with an idea, build a store, launch a website, and take orders.” That won’t keep the doors open too long. What will keep them open is a sound plan and budget.
Think of a budget this way: What is your ideal plan for your money? What do you need to spend your business capital on? And what would you like to spend it on? That’s all a budget really is – your plan for your money. So make a list of business expenditures, track your expenses for three months, and then re-prioritize your assets once you see where you should be spending your money.
You just created a budget, and you will likely stay in business for the long haul as a result.
About Steve Strauss
Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest,The Small Business Bible, now out in a completely updated third edition. You can listen to his weekly podcast, Small Business Success, visit his new website TheSelfEmployed, and follow him on Twitter. © Steven D. Strauss.