Common financial mistakes new entrepreneurs make (and how to avoid them)
There's nothing like the thrill of starting your very own business. Perhaps it's something you've dreamed about for years, and you're finally turning that dream into reality. Maybe you've decided to take the plunge and transform a lifelong passion into a money-making prospect. It's an exciting step into the unknown, with endless possibilities ahead.
However, the path to success is paved with potential mistakes. There's no denying that a vast number of small businesses fail, despite the enthusiasm and passion of their owners. You may not even realise that you're making mistakes until it's too late. Here are some pitfalls to watch out for and some entrepreneur finance tips:
1. Mixing personal and business finances
When you're just starting out, you probably don't have a separate account for your business finances. Perhaps you're operating a microbusiness, doing salon treatments at the weekend, and opening a business account feels like an unnecessarily large step. It's easier to keep all your money in one place, right?
Wrong. Without setting aside your business money, you have no idea what your financial picture really looks like. You won't understand your cash flow, and it becomes far too easy to go way over budget. Plus, you're setting yourself up for disaster when it's time to file your tax returns.
A business account isn't a luxury or something to aspire to opening someday. It's an essential part of new business money management, and without one, you are putting your financial future at risk. A business account doesn't have to cost a fortune; affordable, scalable options like the SumUp Business Account are made specifically for small businesses, and allow you to start your new venture on the right foot.
2. Not setting aside money for taxes
Why do small businesses fail financially? One of the most common reasons is simple: their owners don't prepare for tax season. Your annual tax return shouldn't come as a surprise; the tax year is the same every year, so you should start getting ready well before the deadline.
You may not yet know how to file a company tax return, but there are plenty of resources available online; if you're truly lost, speak with an accountant.
It's important to keep a rough idea of how much tax you'll have to pay throughout the year, so you won't have to scramble at the last minute. Falling behind on your taxes in your business's first fiscal year is a mistake that can be hard to recover from.
3. Poor cash flow planning
Running a business means mastering the art of operating cash flow. To do this, you need to understand the difference between revenue, profit, and your personal income, a crucial lesson for anyone who wants to learn how to manage finances for a startup.
Revenue is the total amount of money your business makes. Imagine, for example, that your new retail business sells 10 T-shirts for £10 each. That's £100 in revenue, but you need to deduct the cost of the T-shirts and your overheads (electricity, rent, etc.) to find out the profit. Maybe that £100 now drops to £75.
Great! You've made £75, or have you? Well, if you're happy to close your business forever and walk away with £75 in your pocket, you can. If, on the other hand, you want the business to grow, some of that money will have to go back into ordering new T-shirts. You don't have £75 cash in the bank to spend as you please. Instead, you'll need to work out how much you can afford to take as your personal income, and how much should be reinvested into your business. Get this wrong and you'll probably run out of money very quickly. Keep track of exactly how much you're spending with a good expenses tool and you'll have a clear idea.
4. Underpricing your products or services
One of the biggest questions for anyone doing startup financial planning to answer is this: how will you attract customers in the first place? Undercutting the competition may seem like a sound strategy. You may even consider that this will only be a temporary measure, and plan to raise prices later.
Unfortunately, this is actually one of the most common small business financial mistakes. Underpricing makes it hard for you to turn a profit; you may even set your prices so low that you don't cover all your overheads. This is particularly risky for new businesses, as you might not have considered all the costs involved in running your company. That puts healthy cash flow out of reach and may send you into debt.
What's more, underpricing products has a psychological effect on customers: it decreases the perceived value of the things you're selling. If your coffee shop is selling croissants for half the price of the café down the road, it can make customers suspicious of the quality. This leads to problems when you try to raise prices later on.
In a race to the bottom, there are only losers. It's far better to start with a realistic pricing strategy and look for other ways to attract customers, such as marketing and occasional special promotions.
5. Ignoring invoicing best practices
Yes, invoices can be a headache, but they're something you'll need to stay on top of if you want your business to be a success. You'll need to issue invoices to anyone who owes you payments. Making invoicing mistakes can lead to late payments and missed income.
Your invoices should always include a clear breakdown of exactly what you're charging for; that means units of products or hours of your time. They must be numbered, contain the correct VAT, and have all the relevant customer information. Any mistakes can lead customers to raise a query, which again costs you time.
They should also contain accurate payment details. A payment link can speed up payments, which is especially valuable for new businesses.
Automate the process with SumUp Invoices, which generates personalised invoices. Link it to your business account, and it'll also track payments, so you'll know at once when a customer has paid.
6. No emergency fund
Your mum was right: you really do need to put some money aside for a rainy day. In fact, it's crucial for avoiding business failure.
An emergency fund protects you if something goes badly wrong. Maybe your food truck breaks down and you need to call a mechanic. Perhaps you get hit with an unexpected tax bill, despite your best efforts. Think about new small businesses that were affected by the 2020 COVID pandemic – an emergency fund was essential to their survival.
Building your emergency fund should be part of your risk management strategy. You may need to start small, but putting some money aside and not touching it can keep you afloat in the lean times.
7. Relying on spreadsheets alone
New entrepreneurs often begin by relying on Microsoft Excel, Google Docs, or another basic piece of spreadsheet software. It's a programme you've been using since your schooldays, and you know it inside out. What could go wrong? Well, quite a lot, as it happens.
Spreadsheets are not built for the purpose of running business finances. Formula mistakes, errors with copying and pasting, and simple human error can all cause problems. Spreadsheets can also be hard to read at a glance; you'll need to set aside a large chunk of time to go through your data and analyse it carefully as you work on plans for future growth.
What's more, they can be painfully inefficient. If you're using them to manage your business accounts, you're trying to fit a square peg into a round hole. You may have to waste valuable hours building spreadsheets that will do what you want, and even then, mistakes happen.
Instead, look for dedicated business software. The most efficient option for new small businesses is an all-in-one business account, like the one from SumUp. It's designed specifically for business finances, so it works smoothly and simplifies tax processes. It also has features like invoice issuing and can automatically track invoices and expenses.
A spreadsheet might be fine when you're running a microbusiness, but it soon becomes unfit for purpose as your company expands. If you have ambitions to turn your small business into a thriving enterprise, start from day one with an all-in-one business account that allows you to scale and grow.
As you turn your small business from dream to reality, don't be afraid to make mistakes. Getting it wrong is part of the process, but it doesn't have to be costly.
