I post tons of articles that I find around the web and think will help you all move your businesses forward. Often, people write in asking me to elaborate on pieces of those articles so I’ve started a series to do just that. I recently posted an article from Entrepreneur about common mistakes people make when launching a new company. The next of those big mistakes: messing up your money!
One of the biggest mistakes new entrepreneurs make over and over again is making a complete mess of the company’s money. You would think we would all understand how important money management is given that a business exists to make money, yet we all too easily let things slide that we shouldn’t or forget to track certain things and end up with a huge financial mess on our hands.
I’ll be going a bit more in depth with quite a few of these in future posts because you really can’t expect to succeed without keeping the essentials in order. For now though, let’s just give a quick overview of the top ways new entrepreneurs mishandle their money:
Of course #1 is simply spending too much. Whether you’ve gotten outside funding or you’re bootstrapping on your own, it’s tempting to want to hire a team and advertise your tail off. You have to be strategic with your limited budget, however, and make sure you’re only spending on things with high ROI.
#2 is just the opposite of number 1: not being willing to spend enough. If you’re not the type that’s tempted to overspend, you’re very likely the type to refuse to spend on anything. But refusing to spend a penny and doing everything yourself is not the most efficient way to build your business. Again, you have to look at the ROI you’ll get for any money (or time) that you decide to commit to a project and sometimes it really does pay to hire an expert.
Another big way that new entrepreneurs mess up their money is just general sloppiness: their records are out of date, they’re not properly tracking, they don’t create budgets or do any forecasting, they don’t get the help of an expert, and they sometimes co-mingle funds between their personal and business accounts. All of that disorganization is common, but it’s also a disaster waiting to happen.
A fourth, very common mistake that entrepreneurs make that messes up their finances is the mis-classification of those that work for you and other HR no-nos. The IRS is not someone you want to get in trouble with so be sure you know who should be an employee vs. who should be a contractor, follow the rules if you’re using unpaid interns, properly pay out your employees’ for un-used sick or vacation days when they leave, make sure you don’t borrow from the money needed to pay your share of employment taxes, etc. You don’t want to be in hot water with the IRS so just follow the rules from the beginning. This is a case when maybe spending some money for expert help would make the most sense.
Finally, a major mistake many new entrepreneurs make is not understanding the best structure for their business and the tax consequences of the structure they do choose. If you’re not a CPA or a tax attorney, get some advice about the best option for you and your business.
Don’t screw yourself from the beginning by fumbling financially. It’s overwhelming to launch a new company and it’s easy to let the financial management basics slip through the cracks, but if you make a mess of your money you’re only creating headaches for your future self.
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