Top Startup Mistakes: Not Properly Handling Money

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Another big way that new entrepreneurs mess up their money is just general sloppiness: their records are out of date, they’re not properly tracking, they don’t create budgets or do any forecasting, they don’t get the help of an expert, and they sometimes co-mingle funds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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Sloppy Financial Management Is Like Death by 1,000 Paper Cuts for a Small Business

I post tons of articles that I find around the web and can help you all move your businesses forward. Oftentimes, people write to me asking me to elaborate on pieces of those articles so I started a series to do just that. I recently posted an article from Entrepreneur about common financial sins entrepreneurs make. I’m going to roll a number of those sins up into one for this post here, and that’s general sloppiness when it comes to managing your business’ finances.

Whenever we talk about financial management it seems a bit silly because, for the most part, we all know what we should be doing. Every business owner is aware that the finances really are the business itself and that making a mess of the money means making a mess of the whole company. In practice, however, we all tend to get so busy with other things that seem more pressing that we can very easily let our financial management practices slide. I’ve done it, you’ve probably done it, almost everyone does it from time to time, but it’s an incredibly destructive habit that can sneak up on you and kill your business.

We’ve all heard the phrase “death by a thousand paper cuts” and sloppy financial management is the perfect example of this happening. In general, no single financial mistake or bit of financial management laziness is going to sink your business. However, if you consistently make little mistakes and frequently let things slip buy, all of those little “paper cuts” build on one another and eventually you’ve got a financial problem too big to solve and your business crumbles.

Clearly, none of us want that, so let’s remind ourselves of the top 4 sloppy financial management practices that entrepreneurs fall victim to.

First up is not keeping up to date records. Nobody likes the drudgery of tracking receipts, balancing the books, and keeping up on accounts payable and receivable, but these things are  the foundation of your business. It’s important to set a system in place that basically doesn’t allow you to not keep your records up to date. Use services that automatically update and apps that track your receipts for you. Do whatever you need to do to make sure you’re staying on top of this. One of the most common – and disheartening – reasons that small businesses fail is cash flow problems and you can nip any cash flow problems in the bud by staying up to date with your record keeping.

The second major bit of troublesome financial management laziness is not budgeting or forecasting. I get that it’s tempting to just figure stuff out as you go along and you probably have the mindset that if you just only buy things that you really need, you don’t need to bother with budgets. That’s a terrible way to look at building your business because it keeps you focused on the short term instead of creating a long-term strategy that will keep your business successful for years to come.

Thirdly, lots of brand new entrepreneurs don’t use the services of an accountant or bookkeeper because they’re trying to save their limited money upfront. I didn’t use an accountant when I started out. If you don’t know what you’re doing, however, you simply have to invest in someone who does. You’re shooting yourself in the foot if you try to take on a task that is so integral to the success of your business but that you don’t enjoy and don’t have experience with. A good accountant will save you major headaches in the future and will often save you enough on your tax bill to nearly pay for themselves.

Lastly, and this is a big one, is the co-mingling of funds. I’ve talked about this a few times before in a few different New Venture Mentor videos but it’s an issue that I see over and over and over again. Money is tight at the beginning of building a new business and things are generally totally unorganized. Sometimes you run to the store and forget to bring the right debit card and sometimes you need to cover a bill for just a couple of days and can put the money right back. It doesn’t matter what the excuse you’ve made up for yourself is. You cannot co-mingle your personal funds with your business’ funds. You need to have separate bank accounts, separate debit cards, separate credit cards, separate everything. Not only does co-mingling your personal money and your business’ money make a mess of things for you in terms of accurately tracking what’s going on, it creates a lack of division between you as a person and your business as a separate entity that will come back to bite you if your company is ever sued or when you’re trying to do your taxes if your company isn’t a pass through entity. If you’re currently mixing funds, resolve today to stop immediately. Take a look at the accounts, zero everything out to where it should be, and NEVER mix the two again.

These financial boo boos may seem minor, but if you add multiple of them up over a period of time, you’re creating major trouble for your business that will give you migraines in the future and could cost you your business altogether. Responsible financial management is the only way to keep your company healthy, so stop committing these sins today.

If you liked this video, please let me know by giving it a thumbs up on Facebook and YouTube and don’t forget to subscribe to my channel and sign-up for email updates so you never miss any tips or info to help you successfully plan and launch your company. 

Are You Financially Ready for Entrepreneurship?

One of the first things you need to examine before deciding if entrepreneurship is right for you right now is your finances. When starting a new business, you’re more than likely going to spend at least a few months in the hole and, despite the fact that your business will be losing money, there will be startup costs and your living expenses that will need to be paid anyway.

When you’re deciding if you’re financially ready to start a company, begin by looking at your savings. Until you start generating a profit, you’ll be living off those savings. How much do you already have saved up that’s available for your living and startup expenses? Are you comfortable spending it and depleting your nest egg to get your business off the ground?

Also take a look at your monthly living expenses. All of your regular expenses: rent, utilities, cell phone, tv and internet, health insurance, food, gas, and everything else will still need to be paid. The bills don’t disappear just because you quit your job and launch your own business. You need to figure out, in advance, how much you need to survive each month so you can compare that to what you have saved up and see if leaving your day job is doable right now.

While you’re thinking about living expenses, also think about an emergency fund. Your monthly budget is what you’ll spend if all goes well. What if your car breaks down or your roof starts to leak? Will you be able to handle these little emergencies if you don’t have your regular paycheck coming in?

Finally, you need to factor in the costs of actually starting up the business. You need to estimate how much you’ll need to get started and combine that with your living expenses, emergency fund, and savings to decide if you can walk away from the day job yet or not.

Now, if this money talk has crushed your dream a bit already, shake it off. It’s important to be realistic about your finances, but, as I mentioned, realizing you’re not ready to turn in your resignation letter tomorrow doesn’t mean your entrepreneurship dreams are dead just yet. It just means your path to fulfilling them will be a little longer or more circuitous. If you want this, you should keep moving forward. You’ll just have to also maintain your current job until you’ve saved a bit more.

After thinking about your financial situation, are you ready to take the plunge into entrepreneurship or not? Leave me a comment and let me know if you think you’re prepared to jump in. If not, tell me why and what you plan to do to make it happen in the future.

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The Basics of Cash Flow Analysis for Startups and Small Businesses

Everyone’s heard the refrain “cash is king” when it comes to running a small business and it certainly can be true. There are many new or small companies that are profitable but are still forced to close their doors because they didn’t manage their cash flow appropriately. That’s why careful cashflow analysis is incredibly important when you’re running a business.

Cash flow analysis is basically keeping track of when and how cash flows into or out of your business. This is different than just tracking your revenues and expenses because revenues and expenses should be tracked based on when money is earned or spent, not when it’s actually received or paid out. Depending on your business, your clients may not pay you for up to a couple of months after you’ve already delivered a service or product, so you have technically earned the revenue, but you don’t have that cash in the bank to pay your bills.

 There are 3 types of cash flow in any business: cash flow from operating activities, cash flow from financing activities, and cash flow from investing activities.

Cash flow from operating activities is that related to the core business and you’ll be able to use the income statement to figure out the cashflow from operating activities by taking the net income and adding back in expenses like depreciation that are not actual cash outflows and adjusting for accounts receivable and payable – cash that has been earned or spent but hasn’t actually been received or paid.

Cash flow from financing activities is that which is related to – surprise – financing activities – things like loan payments you make or payments you receive from loans made to others.

Cash flow from investing activities is that associated with any investments the company has made like the purchase or sale of land or equipment.

A statement of cash flows is one of the three basic financial statements but somehow still gets overlooked by many entrepreneurs. If you’re not familiar with it, you should speak with your financial officer or accountant to get an understanding of what your business’ cash flow looks like. You can also buy my business planning book and review the section on creating financial projections to develop your understanding of the importance of cash flow and how to determine and analyze it. You can get the Kindle version here and other ebook formats here.

Basically, cash flow will give you an idea of the financial health and liquidity of your business by showing you what you actually have available to use to meet the company’s obligations. $1 million dollars in profits isn’t as awesome as it sounds if your cash flow is such that you can’t pay your rent and will be evicted before you can ever collect that $1 million. You need to make a point of regularly reviewing your cash flow and making any adjustments where necessary to improve the health of your business. If you spot some problems, try taking a look at my old video for some tips on how to improve small business cash flow.