11 Financial Mistakes that Ruin Entrepreneurs!

By Trishan Arul    October 21, 2009

Image by Observe The Banana via Flickr

This post started out as a Top 5 list, but quickly grew from there as I thought about my experiences over the years. It wasn’t very hard to find 10 mistakes but since everyone does Top 10 lists, I decided to up the ante with 11! That’s 10% more useful, right? This is part of 1 of 2, the remainder will be in my next post. The list is intended to help first time entrepreneurs ensure that their business is on sound financial footing – its in the order that a typical entrepreneur would encounter each problem. If you’ve already made a mistake or two, I’d recommend fixing the problem before it becomes a real issue for your business.

1. 

   Image by Jon Newman via Flickr

   Computing financial viability – Most people don’t even know what this means but its not as complex as it sounds. You need to figure out if your nascent idea can be turned into a viable business. How much will customers pay (Revenue/Customer)? How many will you have (Qty) based on the market size? What do you need to run your business – product manufacturing cost or purchase price, servers, bandwidth, people, advertising, shipping, etc (Cost)? Is (Revenue/Customer * Quantity) – Cost > 0 ? If not, the idea is not financially viable and needs to be reworked. This is a simple “back of the envelope” calculation that everyone should do at the very beginning.

2. Not making a business plan – You may have heard the saying “those who fail to plan, plan to fail”… its true. I’m not saying you need to spend three months creating a 102 page business plan document with footnotes, appendices, and pie charts – though I am a fan of colored graphics . What you should do is think through all the basics – Customer Problem, Target Market, Product/Service Solution, Delivery Method, Employees, etc. On the financial side, that means creating a projection and budget for a few years (typically 3-5) with at least the first year in detail by month. This budget will be valuable to determine if you have enough money to survive, what big costs need to be paid, where you may be able to save money, how much investment you need, and so forth. Without a budget and plan, you’re just hoping that things work out.
3. Being overly optimistic with your budget – For financial matters, its usually better to take the conservative “glass half empty” approach. No one minds being surprised with extra money, but suddenly finding out you don’t have enough money is a bad thing. Assume it will take longer to make each sale, assume customers won’t pay right away, assume vendors will demand payment up front, if you’re doing development assume it will take 50% longer and cost twice as much… you get the idea.  Unexpected things always crop up, planning on everything going perfectly is the same as expecting to receive boxes filled with money – it won’t happen. And when reality is worse than your plan, you may find yourself out of money and time to complete the product, meet payroll, or other critical business needs.
4. Ignoring personal expenses – Most entrepreneurs have to save money and can do so very creatively. But you can’t live rent free holed up in your parents’ basement dining on Kraft Macaroni & Cheese and PBR while working 18 hours a day. Plan to spend a reasonable amount on your living expenses, including going out once in a while. Starting a business is stressful enough without turning yourself into a hermit. After making a business budget, make a personal budget to ensure that you have adequate money for both.
5. 

   Image by marsi via Flickr

   Mixing your personal & business funds – Keep your business money separate from your personal money and keep good records! The pain of sorting it out after the fact will make you wonder why you didn’t take the extra few seconds each time to do it right. You WILL need to sort it out for tax purposes, financial reporting, bringing on other investors, and budgeting purposes.  Its also easy to do, open a separate bank account, use one credit card just for business expenses (even if its in your name), minimize cash transactions, and always ask for a receipt. Its not easier to mix everything up and sort it out later since you’re creating a bigger headache down the road.

Next week I’ll finish the list but you can start fixing, or avoiding, these mistakes right now.