Depending on which set of statistics you choose to accept, startups fail at a rate of anywhere from 35% to 95%. Tom Eisenmann, Harvard professor and author of the book “Why Startups Fail: A New Roadmap for Entrepreneurial Success,” puts the number at two-thirds. One of the reasons he cites for this is poor money management after “false starts,” where proper research wasn’t done before a product launch. In this article, we’ll break that down even further.
Here are some of the most common money management mistakes small businesses owners make, and how you can avoid them.
1. Not keeping personal and business finances separate
Small business owners often invest their own funds to “get started.” That’s okay, but the amount you risk should be finite. Use your initial investment to open a business checking account to separate personal and business finances. Mixing the two can lead to problems with tax filings and put your personal assets at risk if your business fails. It’s also a good idea to set up an LLC or C-Corp and invest in some decent accounting software. It will more than pay for itself.
How to choose the right business checking account
Business checking accounts come in many shapes and sizes. Accounts with high-yield interest are attractive because you don’t need to move money back and forth between checking and savings. Online-only accounts are convenient and prevent you from going to the bank to make cash withdrawals. Simple, straightforward fee structures are easier to budget for.
2. Not planning ahead for taxes
This is a very common mistake with startups. Tax liabilities go to the bottom of the priority list far too often, when they should be close to the top. Failing to pay your taxes on time (or at all) can result in fines, penalties, and even asset seizures in extreme circumstances. You could also miss out on industry tax incentives or stimulus payments during national emergencies (like pandemics).
How to budget for tax liability
Hiring an accountant to handle your tax filings and quarterly deposits might be the wisest decision you make as a business owner. Your bank may also let you open sub-accounts to put aside a percentage of revenue to pay taxes. These actions can be combined with a quarterly budget review to ensure that you meet tax liabilities when they’re due.
3. Not taking on debt proactively
There’s nothing wrong with taking on debt, particularly in situations when it can help your business grow. Examples of this include adding inventory or staff for a busy season or building an emergency fund to prepare for a down period. The mistake is not the debt itself––it’s when and how you use the funds. Make sure there’s a plan in place before applying for a loan or line of credit.
How a line of credit can help your small business
A business line of credit can provide flexible cash flow when you need it. Unlike a small business loan, which is borrowing a lump sum of money, a business line of credit allows you to take only what you need at that time and go back to the well when more funds are required. This type of debt financing can help cover unexpected bills or invoicing gaps, plus fund expansion projects.
4. Not having business insurance
There are few things in life more frustrating than building a business just to lose it all in an uninsured event like a natural disaster or data breach. Make business insurance a priority and don’t hold back on adding riders for even the most unlikely scenarios. It’s important to find the right policy to protect your business from major financial risk in all areas.
How to find the right business insurance policy
If you live in a flood zone, you need flood insurance. Tech companies want data breaches covered. Businesses that own property should have fire, theft, and liability insurance. It’s best to discuss these options with a licensed insurance agent, preferably one who has worked with other companies like yours. Insurance is a complicated subject matter––get some expert advice.
5. Not setting prices high enough
This is one of the topics covered by Tom Eisenmann in his book about why startups fail. It’s a mistake to set a price point without doing proper market research on consumer demand and competitors. A low price could compress your profit margins and make it hard to manage cash flow. A high price could scare away consumers. The right price could be your key to success.
How to set your prices effectively
The good news about prices is that you can always change them. We’re living in an economy where materials and supply costs have been going up. Your company needs to account for those, so you may need to raise prices to combat inflation. Consumers expect this, and competitor pricing is already going up. Do your market research, cover your costs, and make sure your margins are high enough to turn a profit. Some simple math and an adaptable mindset can help get your business through tough economic situations.