(small business mistake – 5 minute read)
Hi there accounting fans!
Have you started a small business? Are you looking at starting a small business? Here are some common mistakes small business owners make when first starting up! Avoid these mistakes and you’re on your way to setting up an awesome and sustainable business.
Small business mistake #1 – Getting into too much debt
Debt is ever the bane of small businesses everywhere! Every time a client tells me they want to take on debt, I ask them: ‘What do you need it for?’. It’s easy for new businesses to see debt as an easy way to get cash. Unfortunately, debt often comes with crushing interest expense which can burden your future cash flow with high repayments.
If you are planning on taking debt, you need to have a plan on how to spend it. That spending must be treated like an investment. This ‘investment’ that you make with your debt should be able to cover the repayments you have to make in the future. For example: You take a $40,000 loan to purchase a food truck for your business. This food truck will help you head out to events and generate an extra $5,000 in sales each month. Your monthly loan repayments are $2,000 each month.
If you’re unable to generate the cash flow to cover the loan amount, that is a bad loan. Also bear in mind that it’s easy to forecast great returns on your loan investments, however actual business performance may vary. Be conservative! If you already have existing debt, don’t go taking on new debt!
If you have an accountant or virtual CFO, you should talk to them about whether you can afford to take on new debt or not.
Small business mistake #2 – Getting stuck in a franchise arrangement
Before I start, I should preface by saying: Franchises can be good. In most franchise arrangements, the franchisor looks after things like advertising, branding and marketing. Some franchisors guarantee clients/work for the franchisee. The franchisee looks after running their business. In exchange for this, the franchisee pays the franchisor a franchise fee and/or start-up costs.
Unfortunately, there are a lot of predatory franchisors out there. Its easy to get caught in a situation where you’re locked into a franchise agreement as a franchisee, but you’re not getting your money’s worth from the arrangement. In such cases, you can talk to the franchisor to fulfill their end of the bargain (if they’re a relatively small operation). With the bigger franchisors, you may find that it can take forever to get anything done.
Take note that entering a franchising arrangement also means that you have to do things to the franchisor’s standards. So you’re also sacrificing a bit more business autonomy when franchising. While being a franchisee can sounds attractive when starting a new business, the reality is that you’re still beholden to the franchisor’s rules and standards.
Be especially wary of cleaning franchisors as well! A lot of these companies will make you pay (for the franchise) for the right to work less than minimum wage! They may guarantee sales for you, but you may find that you spend longer on these contracts than what you first thought. Given that prices are fixed, your hourly rate may well be lower than minimum wage. Be careful!
Small business mistake #3 – Using business funds for personal use
Arguable the most important tip of all! Your business’ money is NOT your money. Your business is not your personal ATM. Please do not use your business funds for personal use.
We do a lot of book-keeping at our accounting firm. Often the clients with poor cash flows are the ones that are using their business money for personal use on a daily basis. This isn’t the odd online purchase or two. These are grocery, clothing and liquor transactions – coming out from their business account. We’ve been doing this for a long time, we can tell the difference between a business spend and a personal spend.
When you mix your business and personal funds together, it becomes harder to keep track of where your money is going. If you can’t keep track of your money, it often disappears altogether. Personal spending is harder to keep track compared to business spending. For starters, your accountants aren’t going to help track your personal spending. The more you spend out of your business account, the less you will have to cover operating expenses.
So please, keep your business and personal funds SEPARATE!
Avoid mistakes, start correctly!
These are just some of the most common mistakes that I’ve seen small businesses make. Of course there are plenty of other pitfalls and traps all start-ups and small businesses can fall into. From a financial point of view, if you are careful about avoiding these mistakes here, I can guarantee that your business cash flow will be better. When cash flow is good, your job becomes easier!
Now get out there and do the right (business) thing!
Stay Positive!
Sam