The journey of entrepreneurship is both challenging and rewarding. But not every entrepreneur is able to turn a perceived risk into an asset. You may have a unique idea, a perfect business plan and even a great team at your disposal. But if your money management is not up to the mark; the chances of building a successful business are very less.
So, if you are a first time entrepreneur or looking to jump into the exciting world of entrepreneurship, here is a look at 5 common financial mistakes to learn from.
1. Heavy initial capital investment:
Swapnil, a hotel management graduate, nursed a dream of opening a restaurant serving authentic Mediterranean food. The only problem was that it would require huge capital investment. Swapnil has two choices. Either he takes a risk and invests heavily to realize his dream, or starts small with a catering business and builds up his dream gradually. The second step involves a more balanced approach.
Many first time entrepreneurs do not give due importance to the base strategy of starting out small.
Starting with a small capital investment should be considered as the first step towards your larger goal. Starting small allows you to test the waters before taking a giant leap.
2. Not keeping personal and business accounts separate:
Mixing is a sure shot recipe for disaster unless you are working as a bartender. Mixing personal and business financial accounts is a common practice. The main reason is that a while you get interested on your personal savings account, no interest is offered on current account.
Know the difference between a Current Account and a Savings Account.
But in time, this would result in poor planning, both with your personal as well as your business expenses. While using personal money to fund business expenses, you will not have a clear idea about your business related expenditures and, thereby, your actual profit and line of improvement. It also results in bad budget planning at home which, in turn, may result in poor investment habits and loan management.
Never mix your professional and personal accounts and keep a disciplined approach to keep them at an arm’s length even in any financial emergency.
3. Meeting business expenses from personal money
Business and personal expenses should be kept separate like chalk and cheese. Using personal accounts for business is a high-risk affair.
Meena, a high flying advertising professional was in the habit of using her personal credit card to book her official travel tickets. While Meena used to get it reimbursed while filing her taxes she had to project all business expenses for tax saving. But as she used her personal card to pay her travel bills, she couldn’t produce any proofs for business tax claiming and hence, missed a good chance.
Make sure that all your business-related expenses are carried through business accounts, irrespective of the amount. This way you avoid any financial hodgepodge.
4. Poor loan repayment planning:
With many government-promoted schemes offering easy loans to upcoming entrepreneurs and startups, raising finances for business is not that difficult today.
But there are many entrepreneurs who do not focus on repayment planning. As the initial years of a business is full of ups and downs with irregular income, poor planning may wreck you financially and make you a loan defaulter.
Borrow only what you can repay. Once your company and product are more established you can always increase the quantum of the loan.
5. No budgeting for variable income:
Rome was not built in a day and neither was any successful business. No matter how foolproof your business plan is there is always room for variable income.
Many first time businesses experience irregular incomes. Some months you may have enough funds, while at other times you will have to go months without any earnings. It is recommended to devise a financial plan by saving for the future from every earning. This means that you are never short of funds, even in months with no income.
Additional read: Useful tips to reign in your variable income
Consider having a variable income at least in the first few years. Plan your business finances in such a way that a variable income does not hurt the day to day functioning of the business, including monthly expenses.
Money management is the difference between a successful enterprise and a failed one. Many first time entrepreneurs fall in the financial
mismanagement trap and end up burning their dream.
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