Starting your entrepreneurship journey is exciting, but it comes with its challenges. From business development to team building and managing time to managing finances. Did you know that over 82% of businesses fail because of poor business finance management? Limited resources, lack of staff, and limited finances make new and small businesses more vulnerable to mistakes and challenges. Plus, the focus is always on other business operations and not on maintaining and tracking cash flow, which is a secret sauce to success. So, if you are here to learn about business finance management mistakes that you must avoid, give this article a read.
Failing to Secure Sufficient Funding
Imagine running out of cash even before you could start making a profit. Many entrepreneurs underestimate how much capital they will need to start and run a business. So, if you dont have enough capital, start by researching reliable funding sources such as loans and grants for funding your venture..
There are quite a few available financing options. The most popular options include venture capital, crowdfunding, angel investors, bank loans, and home equity. However, a home equity loan or HELOC (home equity line of credit) is the ideal option as it offers flexible payment plans and relatively lower interest rates compared to other financing options. Once you have secured funding, make sure to plan for future expenses and try to avoid taking on excess debt.
Mixing Personal and Business Finances
For some entrepreneurs, using a company’s account as a personal debit card may not seem like a problem. Still, it can make managing finances difficult in the long run. Mixing personal and business expenses not only makes cash flow management difficult but also leads to complications during a tax season. When you mix personal and business expenses, the tax season can land you in hot water. This is because you won’t be able to document deductible business expenses, and incorrect tax filing may lead to legal issues.
Moreover, if all the finances are mixed up, you won’t be able to track and document money coming in and going out of the business, leading to liquidity issues. Therefore, separating your personal and business expenses will help you avoid legal trouble and maintain cash flow, enhancing your business’s credibility.
Ignoring Cash Flow Management
Whether you sell products online or offer services, cash flow management can be the deciding factor in your business’s success. It is essential to manage incoming and outgoing cash, especially for new companies that have just started operating. Once you have separated your personal and business finances, the next step is to maintain a consistent and transparent cash flow.
However, cash flow management does not have to be complicated. You only need to learn how to assess the cash flow to help you get your finances back on track. For instance, you must learn to evaluate three crucial business financial statements: the balance sheet, the cash flow statement, and the income statement. Understanding these statements will allow entrepreneurs to make informed decisions regarding investments, operational costs, and personal finances.
Lynn Martelli is an editor at Readability. She received her MFA in Creative Writing from Antioch University and has worked as an editor for over 10 years. Lynn has edited a wide variety of books, including fiction, non-fiction, memoirs, and more. In her free time, Lynn enjoys reading, writing, and spending time with her family and friends.
