If you’re just starting out on your entrepreneurial journey, you should know that you’ve got a long and potentially hard road ahead of you.
About a third of new businesses fail in the first year; half of new businesses close by the end of the third year. In some cases, businesses fail because of marketing mistakes, economic factors, or even mismanagement.
In some cases, however, new businesses fail because of financial mistakes that could have been avoided.
Here are some of the top financial pitfalls new entrepreneurs face, and what you can do about them:
Borrowing money because you can. Small businesses need cash to get going, but borrowing money adds to your overall financial burden in the form of interest. If you must borrow money to get started, do so, but don’t borrow more than you need. Take the time to choose the right loan program and lender as well.
Not paying payroll taxes in a timely fashion. This is one that gets a large percentage of small businesses When you pay your employees, you’re collecting a portion of their money in order to pay the government. This responsibility is squarely on your shoulders. Every time you cut payroll checks, you need to put the tax liability into a separate account that won’t mingle with operating funds. It’s no longer yours. Wait too long, and you’ll wind up with penalties, interest, and a painful struggle to catch up.
Offering credit. New businesses want to get off the ground. They’re hungry for sales. Yet, if you’re not able to collect on the money that customers promise to you, your business is going to close. Even if it’s accepted practice in your industry to extend credit and accounts receivable, think long and hard about doing this.