A lot of young people are starting their own companies. Starting up a company can really be invigorating for our young entrepreneurs in today’s tough economic times, but not every start-up lands with having a booming company like ‘Flipkart ‘or ‘Amazon ‘. Most of the loopholes come from having a dodgy financial planning. Though many of them become so engrossed in their daily business schedule that they often cross the line of managing their finances.
Major, co-founder of Yellowhammer Media Group in New York says,”We were funneling all of our money into the business and not taking anything out… The company was buying us lunch”. “It made taxes really complicated”, he added. Major founded the company almost a decade ago when he knew nothing about the finances and used his social security number instead of Company’s Tax ID number to purchase online ads which owed him back taxes of $60,000 of the company’s revenues.
These money fallacies are very recurrent in every start-up. Here are some very common mistakes made by these young entrepreneurs and how to prevent them –
- Overinvesting in the Business – Spending thriftily on your start-up without giving too much attention to it’s actual worth can quickly mismanage your deal on finances. Many young entrepreneurs buy extremely expensive machines or equipment out of excitement and rush, thus leaving nothing but a hole in their balance sheet.
Henceforth, it is advised to the young entrepreneurs to focus more on the product and make it a hit. Once it is popular among the customers, it would be worth investing more on the machinery.
- Cutting corners on formality – Many start-ups back off from getting an experienced legal and accounting advisors. They try to save money by asking their some random known lawyer or an account advisor and thus, creating more chances to losing the money on personal taxes which could have been avoided by hiring experienced people.
It is always preferable to get a reputed attorney and account manager to go through your finances, or else the loss might even shoo away the potential investors leading to more investment through your pocket money.
- Cutting your own pay – Keeping a reasonable amount of salary for your own expenses is very much advisable. It might feel that by blowing off all your resources into business can help keeping up with the money problems, but in the longer run you end up paying your house rent or food bills through the money kept for business which can imbalance your finances keeping you in depression.
- Failing to plan for the worst – Out of over confidence many young entrepreneurs fail to plan for any worst situation. Better create a “plan- B” to have an insured backup for the company in case it runs down. Johnson recommends to set up a revocable trust to avoid any costly court procedure known as “probate” and decide who should run the business ahead in your place. In case of partnerships, be prepared with a “buy-sell agreement” which looks after what happens if a co-owner detaches himself from the company or any other case like this.
- Mixing business and personal assets – It is certainly not a good idea to mix business on the risk of personal assets thus, implying there is no vector to growth. Avoid making collateral on personal assets or the bank could really run behind your back being the only one liable personally for the loan, whether its guaranteeing a loan or getting another mortgage for your second home.
- Using personal credit cards for business purposes – Getting a separate business card for your company expenses is a far more thoughtful idea than using your personal credit card for these business charges. For example, if your business gets audited, then you should be having some proofs of the business expenditure records from last three years and therefore, using a single card can create an organisational disorder.
- Raiding the company’s coffers – Being inexperienced, these young entrepreneurs use their company’s money bank to buy luxurious items for themselves leading to a depletion in your bank balance. There have been many companies who were doing really well and drastically went bankrupt because of the members over spending their business money to lead a lavish life or to buy a luxury car instead of planning it strategically on how it should be spend.
- Be straight forward and honest with Investors and Lenders – Avoid being shady about your goals and ideas to the investors. If you are secretive about the money involvement and usage nobody will trust you. Thus, having a transparency between your company and investors help create a credibility between you two and they can even help you in your tough times.
- Find suitable Potential Customers – Try to establish your brand among some targeted potential customers and once its’ liked by them, you will start getting your required publicity. Stop wasting your money in gathering a huge crowd or in determining who your actual customers are.
It’s true that wisdom comes with experience and age. Hence, you are more error prone at a younger age and much inexperienced. Understand the value of time and every time you are spending that is completely unrelated to your business plan is time wasted. Get your goals cleared before starting up a company which include both the long term and short term goals, a target market, a proper organisational structure and proper financial planning. Never even think of taking financial plans for granted since they form the framework of your business idea, as no business can ever run without involvement of money.