Are you in the infancy of your small business? No matter what industry you’re in, it’s likely you have made or will make some common mistakes within the first five years in business. I should know since I’ve made every single one of them! As you create your “new normal” during and after the Covid crisis, it’s important to know what these common mistakes are and how to avoid them. Here are the seven I see entrepreneurs often make:
1. Not separating business and personal accounts
Separate to dominate is a good mantra to keep in mind when it comes to your business and personal accounts. Co-mingling funds leads to confusion at tax time and inaccurate numbers when trying to determine profits. You should have two separate accounts: one for your personal use and one for your business use and make sure all purchases and deposits go through the proper accounts.
2. Making immediate large business purchases
When it comes to building your small business, you need to focus on both your expenses and your revenue to arrive at the real indicator of success: profit. A lot of entrepreneurs think they need a fancy office or a top-of-the-line computer to be successful, but these cut into profits in a big way. Start small with the essentials and build your way up to larger purchases once your business is established and regularly turning a profit.
3. Making immediate large personal purchases
The same holds true for your personal purchases. If you’re buying brand new sports cars and taking quarterly trips to Hawaii, you’ll rely on your business to provide larger and larger profits to cover your spending. Will you be able to do things like this down the line? Yes, if you handle your growth right during these crucial early years. Be patient, create a reasonable budget, and keep your personal spending to a minimum.
4. Taking out credit card debt based on expected income
Many of us suffer from a bit too much optimism when we start our business. We’re so excited about our product or concept that we just assume we’ll be wildly successful right out of the gates. Based on this optimism, some business owners put a lot on their credit cards and just assume they’ll be able to pay it off when the money rolls in. This can get you into big trouble very quickly. Always base your spending on true profits instead of expected revenue and don’t buy things you can’t afford.
5. Not planning for the lean times
If there’s one lesson to be learned from the pandemic, it’s that we always need to plan for the unexpected. If you’re not putting any money into savings every month to cover your butt should the worst happen, you could lose it all when a crisis hits. Don’t have enough to put away each month? Then you need to either increase your revenue, cut your expenses, or both.
6. Making Uncle Sam your business partner
If you don’t manage your finances correctly, Uncle Sam can become your not-so-silent business partner and take a big chunk of your profits. To avoid this, you need to look at smart ways of deducting business expenses and use tax-deferred vehicles such as SEP IRAs or individual 401(k)s. Working with a fiduciary or accountant will help you limit what you pay into the government and help you save for the future.
7. Moving Forward without GPS
Would you try to drive somewhere you’ve never been before without plugging the address into your GPS? Probably not. The same goes for your business. You simply don’t know where you’re going unless you have a GPS—which in this case is a business plan. A business plan keeps you on track, helps you determine if you’re meeting goals, and shows you the next steps on the path to business success.
Have you made one (or more) of these mistakes? It’s perfectly natural and the way that you learn. However, the more mistakes you can avoid, the quicker you’ll be able to grow your business. Want to learn more about building a successful small business? Check out our Wealthy Entrepreneur Course.