Some common financial mistakes to avoid as a new entrepreneur

Making mistakes when you’re starting out is inevitable, but there are some business finance mistakes you just can’t afford to make!

When you’re launching a new business, especially your first one, you’re bound to make many mistakes. A lot of them will be building blocks for your business, and you’ll be grateful for them in retrospect. But some mistakes can be very costly for a new business, and you will want to do your best to avoid them. Here are some common and unfortunate financial mistakes a lot of entrepreneurs tend to make when starting out.

1. Not having separate business and personal accounts 

When you’re starting out, it may seem unnecessary to create a business account since you’re probably a one-man show who’s using your personal savings. But the longer you wait, the trickier it will get. You need to have different bank accounts and credit cards for your business and personal use. It can help you get a clear picture of the financial health of your business and is the basics of business finance. It will also work in your favour when you want to pitch to investors at a later stage. 

2. Making too many big purchases at the beginning 

It’s natural to want to get the best of everything when you’re starting out your venture – from new laptops to fancy furniture. But it’s also important to bootstrap wherever you can. You shouldn’t get too excited at the beginning and make too many big purchases. First, make use of everything you have and consider such purchases only after you start turning a profit and have a positive cash flow.

Related: 5 Common investing mistakes that can hamper your returns 

3. Not setting clear goals 

When you set goals and lay down a timeline – monthly, quarterly, annually – you give yourself and everyone else working with you a clear idea of where your business needs to head and what everyone needs to work towards. From determining how much to invest in R&D to how much to spend on marketing, you need to get these numbers figured out. 

4. Giving away too much equity

Sources of business finance are plenty and this is one mistake you shouldn't make. Whether it’s investors or even your friends and family, don’t make the mistake of giving away too much equity, especially at the beginning when the valuation of your business is low. Not only will you be giving away a chunk of your business for minimal cash, you’ll also be relinquishing control in the long run. 

5. Relying on others to look after the finances 

It’s okay if you don’t consider yourself a numbers person; you will still need to know exactly what’s going on in your business. Even if you have hired someone really smart and trustworthy to keep an eye on the finances of your business, as the entrepreneur you have to know all your numbers very well – from cash flow projections to per-unit costs and everything else related to business finance. 

​Related: Stand Up India Budget 2019: What’s in it for entrepreneurs?

6. Not knowing the financial basics

In order to know your numbers, you first need to understand them. If you have to take up an accounting and finance course or spend time with your accountant – do it. From reading books on the subject to watching videos, you have to make yourself understand the financial basics, so you don’t feel intimidated when it comes to managing the business finance. 

7. Sacrificing your salary 

When you leave a well-paid job to start your own venture, you make a lot of sacrifices and adjustments. Yet many entrepreneurs don’t feel comfortable drawing a personal salary when their new business is struggling for cash. You don’t have to draw a salary from the outset, but you don’t need to forego it forever either. You can claim the salary at a later stage by converting that amount into a personal loan to the company. 

​Related: 11 Financial mistakes that Indians commonly make 

8. Incurring expenses based on expected revenue

One very important and basic accounting rule is to record anticipated losses but never to account for anticipated gains. In simpler terms, don’t count your eggs before they hatch. A lot of entrepreneurs make the mistake of incurring expenses, especially credit card debt, based on their expected revenue. Don’t do it because projected revenue is not actual revenue. While you can seek additional funds from other sources of business finance, in the earlier stages you don't want to do that on the basis of revenue projections.  

Already made some of these mistakes? It’s okay, you can still enable correction mode. But it’s better to do it sooner than later! Make sure you share this article with your entrepreneur friends because it can be a great conversation starter where you can discuss common mistakes and help each other avoid them. Take a look at these financial tips that every aspiring entrepreneur must know about.