When you’re starting a business, it’s important to be mindful of your finances and stay out of trouble. Unfortunately, many startup businesses fall into common financial traps that often lead to disaster down the road. In this article, we will discuss some of the most common financial traps startup businesses fall into and how you can avoid them.
1. Not Separating Business and Personal Funds
When you’re first starting out in business, it can be tempting to cut corners and save money by commingling your personal and business finances. After all, you’re the only one running the show, so why not just use the same bank account for everything? However, this is a recipe for disaster. If your business ever gets into legal trouble or gets sued, your personal assets could be at risk if your finances are commingled.
You will want to have a clear picture of how much money your business is making and spending, and this will be very cumbersome and time consuming if your finances are all mixed up. If this results in shareholder loan balances owed to or from you, this makes fundraising or lending much more challenging, as it either indicates a lingering payable balance to you or a receivable balance from you, each indicating co-mingling to potential investors.
The best way to avoid this trap is to open up a separate bank account and credit card for your business and make sure all of your business-related income and expenses are funnelled through that account. This will not only protect your personal assets, but it will also make it much easier to keep track of your business finances.
2. Not Staying on Top of Your Books
When starting out, it’s easy to let your bookkeeping fall by the wayside in favor of more pressing matters. However, this mistake can come back to bite you down the road. Make sure you keep meticulous records of all your income and expenses from day one and hire a qualified accountant or bookkeeper to help you stay on top of your books.
If you have expenses up front, and you’re GST/HST registered, you can claim these as ITCs (input tax credits) which will reduce the amount of GST/HST you owe to the government, but you MUST have the proper documentation in order to do so. Failing to stay on top of your bookkeeping can also lead to problems if you ever need to apply for a business loan, as lenders will want to see detailed financial statements before they approve any funding.
So, make sure you are staying on top of your bookkeeping from the very beginning, and you’ll save yourself a lot of headaches down the road.
3. Spending Without a Plan
Starting a business can be a very exciting time. There is so much potential and so many possibilities. However, it is important to remember that a startup business is just that – a startup. This means that there is a lot of risk involved and that caution should be exercised when it comes to spending. When you first start generating income, it can be tempting to spend it all willy-nilly without any sort of plan or budget in place. However, this is a surefire way to quickly burn through your cash and find yourself in financial trouble.
Before you spend any money, ask yourself whether the purchase is absolutely necessary, and if so, whether there are cheaper alternatives. Once you have a handle on your regular expenses, you can set aside money for long-term goals like retirement or investing in new equipment.
And remember, just because you have money doesn’t mean you have to spend it all right away. It’s important to be mindful of your spending and make sure that every dollar is being put to good use.
4. Be Careful with Debt
Debt can be a useful tool when used wisely, but it can also be a dangerous trap for businesses that are not careful. If you’re taking on debt to finance your startup, make sure you have a solid plan in place for how you will repay it. Additionally, be aware of the interest rates on your loans and credit cards, as these can add up quickly if you’re not careful.
And while debt can be a good way to finance growth in your business, it’s important to remember that there is such a thing as too much debt. If your business is struggling to make ends meet because of high-interest payments, it may be time to re-evaluate your situation and look for alternative financing options.
So, when it comes to debt, tread carefully and make sure you have a plan in place for how to repay what you borrow.
5. Paying Yourself Last
When you’re first starting out, it’s easy to get so caught up in the day-to-day operations of your business that you forget to pay yourself. However, this is a mistake that can have long-term consequences. As the owner of your own business, you need to make sure that you are taking care of yourself and avoid contributing to burnout.
This means setting aside money each month to cover your personal expenses and taking some time off now and then to relax and recharge. If you put all your time and energy into your business without taking care of yourself, you will burn out quickly.
6. Failing to Plan for Taxes
One of the most common traps startup businesses fall into is failing to plan for taxes. This can be a costly mistake, as tax liabilities can add up quickly if you’re not careful. Make sure you set aside money each month to cover your estimated tax liability. Talk to a qualified accountant or tax advisor if you have questions about how much you should be paying.
Also, remember that your business may be liable for different types of taxes, so it’s important to be familiar with the different types of taxes and how they work. Failing to plan for taxes can put your business in a difficult financial situation, so make sure you are taking the time to understand your tax obligations.
Starting a business is a big undertaking, and there are a lot of traps that businesses can fall into along the way. However, if you’re mindful of these traps and take steps to avoid them, you’ll be in a much better position to succeed in the long run. So don’t let yourself get caught off guard – plan ahead and stay focused on your goals, and you’ll be well on your way to success. Thanks for reading!
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