Research from the U.S. Bureau of Labor Statistics shows that approximately 20% of small businesses fail within the first year. This is primarily due to financial mistakes. As a small business owner, it is important to understand that your first year in business will make or break you.
Below, we’ll explain 8 of the most common financial mistakes that entrepreneurs make within the first year of business.
Top 6 Financial Mistakes
Leasing Too Much
There are two possible outcomes for this mistake:
- Lease for too much space
- Lease for longer terms than you need
Many entrepreneurs find themselves signing a lease for a space that is too big for an appropriate amount of time- or on the other end, a space that is ideal for your business but the terms are too long.
Investing Too Much
When you’re first starting a business, it’s natural to want the best and to invest in those things right at the beginning. However, this can put you in a bind because you are using up all of your startup cash. Plus, it gives you a false sense of success before you’ve done any work.
Raising Too Much Venture Capital
If you’ve decided to try to get venture capital, it’s important to note that getting too much can be a bad thing for several reasons:
- You may find yourself cash-poor in the future because you spend too much
- All of your investors have different opinions about your business
- You won’t have room to make adjustments as you learn new things and find new opportunities.
- Finally, you may be successful enough that you don’t need venture capital- which means your investors will still own more than necessary, which cuts into your profits.
Combining Business and Personal Finances
When you combine your business and personal finances, it’s much more of a challenge to see how your business is doing. You won’t be able to determine if you have the funds to expand and market or you may think you’re doing better than you really are because your spouse is bringing in money from their own job. Additionally, combining business with personal funds can confuse the IRS.
Not Paying Quarterly Taxes
Every quarter, as a business owner, you have the chance to estimate your tax burden based on your profit and loss statement- and pay those taxes in advance. If you don’t do this, you’ll be required to pay interest and penalties for not paying quarterly taxes. Also, you may receive a large bill at the end of the year that you can’t pay.
You may have no problems starting and steering your business without a plan- but if you do not have an idea of what you’ll be making versus what you will have to pay for it, you’re planning to fail.
If you are a small business owner in or near Cincinnati, trust Orcutt & Co. to take care of your accounting and tax needs. We look forward to working with you and helping your small business succeed!