Key Accounting Mistakes to Avoid When Looking to Start Your Very First Business
The risks associated with starting a business are monumental, but if things go your way, you can end up becoming another success story and inspiration for aspiring entrepreneurs. One of the main reasons most businesses fail is that they are unable to manage their finances effectively, leading to poor ROI. In order to ensure success, you need to make well-grounded financial decisions, such as choosing to franchise if this is the best decision for you (like choosing to start one of the best senior home care franchise companies), and take calculated risks when investing in different aspects of your business. Take a look at a few accounting mistakes you should avoid while starting your first business.
1.Mixing Up Your Personal and Business Accounts
It’s common for people to advise that you should keep your personal and professional life separate while working for an organization. The same applies to your personal and business accounts while running your startup. If you keep them separate, you’ll be able to evaluate how much your business is actually making. You have to keep track of your financial records to find out how much you have exactly invested, and the ROI your business is generating. If you don’t, you’ll soon realize your personal funds have mixed up and disappeared without any recorded transaction. If you are too busy to keep track of your finances, hire a professional bookkeeper or accountant to help manage the accounting side of your business.
2.Falling in a Debt Trap
If you don’t have enough money to start a business, you can turn to a local bank for a business loan. Even though it will help you bridge the financial gap, you’ll have a large debt on your plate to deal with and that can potentially create a lot of problems for your business. If you fail to pay back the loan, it will affect your reputation in the market, and clients and partners may not want to work with you. In the worst scenario, it may lead you to file bankruptcy. It’s better to be patient and gather enough savings before starting a business, so that you don’t have to take loans putting extra pressure on your shoulders.
3.Not Saving Up for Emergencies
It’s always advised to keep backup cash for emergencies. A business journey is full of surprises – you never know what’s coming for you. With a constantly fluctuating economy, you can’t expect to make enough sales all year round to generate sufficient revenue to cover your expenses. It is likely that you may need extra money to pay the bills and keep your business afloat. It is advisable to take a portion of your profits and transfer it into retained earnings. That way, you will always have extra cash to settle your expenses during hard times without having to borrow money from others.
4.Setting Nearly Impossible Goals
Most people set unrealistic goals like becoming a multi-millionaire within a few months. Setting objectives is a good tactic to stay focused and measure success, but they shouldn’t be nearly impossible to accomplish. Start your business by setting SMART goals, like 15% rise in profit in the second year, 500 customers within six months, or purchase a new truck for your business within a year. Set milestones that can be achieved.
5.Not Chasing Payments
Never stop chasing your payments, or you’ll run out of cash to fuel your business operations. Many businesses have crashed due to lack of cash in hand, even though they showed reasonable profits on the books. Cash flow is one of the key factors to survive in the market. Don’t go easy on your debtors –contact them from time to time and prompt them about the deadline to pay off the credit balance.
6.Making Large Purchases
While starting a new business, you may be tempted to invest in the latest technology and design your office in the best possible manner. However, did you calculate the opportunity cost of purchasing all the new equipment? You could save a lot of money if opt for used equipment instead. Remember, a successful entrepreneur utilizes their funds and available resources to squeeze out the maximum benefits, instead of wasting on unnecessary things.
Starting your own business is filled with high risks, and no one can guarantee you success. However, the above-mentioned tips can help you avoid some of the more common mistakes that could cost you a fortune if not taken into consideration.
About the writer: Steven McMeechan is a strategic marketing and communications specialist with over twenty years’ experience in senior marketing management roles across a range of industries including Information Technology and Financial Services. He works for Capstone Financial Planning and lives in Melbourne Australia.
