3 small business mistakes to avoid when starting

(small business mistake – 3 minute read)

Congratulations on starting a business! It’s a huge step for many people. In my line of work as an accountant, I’ve helped many new business owners start their own business. Along the way, I’ve seen many of the common mistakes that people make that hinder their ability to run their business. Here are 3 of the biggest mistakes I’ve seen being made:

Small business mistakes #1: Getting into debt too soon

Look, I get it. To make money you sometimes need to invest money. If you don’t have money to invest, then you take a loan from the bank. Then you pay off the loan once you’ve got the business running. Easy right?

Not really.

Everything looks nice when you’re forecasting for the bank your 200% ROI in your first year of business. However the reality of business is uncertainty. Especially in your first year of business. If you don’t have a few (about 3) years of business under your belt, it is difficult to forecast what your business performance will be like.

Having $100,000 in your bank account from a loan is great. But what’s not great is that you need to pay it off. Regardless of how your business is doing. Also, you need to pay it back with interest. Oh, and that’s compounding interest by the way. Depending on how long it takes you to pay it off, that $100,000 could easily become $150,000 or more.

You should only take out a loan when you’re certain that the investments you make will translate into more income. This usually happens in your second or third year in business.

Small business mistakes #2: Getting stuck into a franchise agreement

It can be exciting to run a franchisee business. The franchiser will often help with sales and marketing. Some franchisers can even guarantee sales for you. But if you’re getting into a franchise agreement you must remember one thing:

Franchisers are going to put themselves before you.

I’ve dealt with a few clients who ended up regretting their franchise agreement. Often there is a high up-front cost involved (which means they have to take out a loan). Sometimes the promised work doesn’t come through. A lot of the time, clients who are franchisees feel like they’re not getting their money’s worth from the franchise agreement. A common sentiment that I hear from franchisees is ‘Heck, I could do this myself and NOT have to pay the franchiser their fees’.

I’m not saying all franchisers are bad. But you need to properly understand what is the trade-off between you and the Franchiser. Be very clear about what the Franchiser will provide to you and what you’re expected to do as a franchisee. Remember that in a franchiser-franchisee arrangement YOU are the customer and you have every right to demand that you are looked after.

Also, remember that until you work off the upfront fee (if there is one), you’re not making any income. This means that you have to be prepared to work for virtually nothing for the first few months (or years) of your franchisee business.

Small business mistakes #3: Mixing business and personal funds

In my opinion, this is the biggest sin a new business owner can commit. As an employee, most of us will have one account that our salary goes into. This is the same account that we use to buy groceries, eat out, etc. When becoming a business owner, it’s normal to carry out the same habit of doing your personal spending from the same account.

You shouldn’t do that.

Even if you are self-employed/sole trader, you need to keep a separate account for your business transactions. This makes it easier to separate business expenses from personal expenses. This is because business expenses are tax deductible. Personal expenses are not.

For example – you run a home catering business. You purchase ingredients from the grocery on your personal credit card. When its time to calculate your expenses, it will be very difficult to work out which ingredients relate to your business and which relates to household use. Its important to calculate an accurate profit figure as this will affect your taxes. Business profits will also affect your ability to apply for house loans.

If you keep your business expenses separate, its easy to tell apart your personal spend from your business spend. This makes calculating profit easy. It also means you can take out the right amount of money from the business if you need to pay yourself.

You got this!

If you’re a new business owner, be sure to watch out for these mistakes. Being your own boss can be rewarding, but it can be very challenging as well. Stay sharp, and most of all,

Stay Positive!