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Common Startup Finance Mistakes

Money is often tight for startups, but if you avoid these common mistakes, your budget can go much further.

When you are just starting your company, you will find that money is a concern and if you haven’t planned well, it could easily become a big issue. Nearly all new business owners run into at least one financial problem, usually one that could have been prevented with just a little more advance planning.

Underestimating Expenses

This is one of the more common issues faced by business owners. Nearly everyone underestimates their startup and operating costs, so you need to be very thorough in your planning. A business plan will help you come up with a fairly realistic budget in most cases, but even without a business plan, you should work out a budget for the first six months and the first year.

Some of the often-missed factors include the following:

Auto Insurance: Are you using a vehicle for your business? If so, you will need to insure it specifically for business use.

Payroll: You know you have to pay your employees, but many business owners forget to include the withholdings in their budget. These include things like insurance, Social Security and other benefits, as well as taxes.

Variable Costs: Things like electricity can vary month to month and may be very difficult to budget for. Always err on the higher side . . . the worst that can happen is you save money instead of spend it.

Overestimating Income

It’s easy to get carried away and assume you will sell plenty of product and have enough money. Many entrepreneurs start to assume that they'll have more than they actually end up with. To avoid this problem, try working on two cash flow projections. One should be a regular projection, which assumes things will go both well and poorly; a middle-of-the-road report. The other needs to be a conservative forecast that looks at what will happen if a lower than anticipated amount of product is sold, or if you end up having to cut your prices.

By looking at both scenarios, you will be better prepared if things don’t go as well you had hoped. Look to keep costs at the same level as the conservative cash flow projection and if things go well, you will enjoy the benefits. Should things not go as well, you will still be able to continue on with your business because you’ve planned for this possibility.

It’s very easy to overestimate your income until you have actual monthly records to look at, so stay conservative.

Forgetting Salaries

You need a salary and even if you are the only person working your business at the moment, it’s vital to pay yourself a wage. Unless you have enough in your personal account to survive the first year of your startup, that money will be essential. Unfortunately, many business owners forget this and will end up using the money for other purposes.

Remember that while you may keep your own wage at a minimum in the beginning, it is still a business expense and must be considered in the budget.

Using the Wrong Prices

You know that you need to make a profit on your products and services, but just how much is necessary? Many business owners assign a random number or percentage to the cost of a product in order to get the selling price, but this is very inaccurate, particularly if you are just starting out.

In order to accurately assess the price, consider all the factors that will affect your business. The cost of each product is only part of the actual cost. Other factors to consider include:

  • Rent
  • Electricity and utility bills
  • Wages
  • Packaging
  • Advertising

These all need to be covered by the sales you make, which can mean that the actual cost of each product is considerably higher than what you paid for it.

Another common pricing issue is to set your prices too high. You may feel that your services have this much value, and indeed, they may, but when you are starting out, it can be very difficult to break into the market with above average prices. You will be better off starting lower and raising your prices once you have established yourself. Look carefully at the market in addition to calculating your costs to ensure that your prices are at the right point. Never guess when it comes to pricing or you could lost a lot of money.

Not Hiring an Accountant

Taxes can seem distant when you first start your business, but tax season comes around quickly and you need to be ready. While not every business needs a full time accountant, you should have someone trustworthy to help you stay organized. Even if you only plan to bring in accounting help for taxes, make sure you have a good system for organizing receipts.

All of these potentially disastrous financial mistakes can be avoided with a little advance planning. If you have already made them, then you will find it more difficult to fix the problem, but it can be done, provided you are willing to put in the work required to plan out your budget ahead of time.

Photo courtesy of ShellyS via Flickr

Starting a Business?
Join Docstoc's 100% Free Quick-Launch Guide to Starting a Business! Curated Exclusively by the Editors of Docstoc