What are the common financial planning mistakes entrepreneurs should avoid?
- Not defining your financial goals first
- Forgetting to set up an emergency fund
- Failing to separate business money with personal money
- Immediately making big business purchases
Starting a business can be an exciting and overwhelming experience, especially for startup entrepreneurs. Entrepreneurs are inspired to start a business for a variety of reasons. Whatever your reason may be, keep in mind that many people make the fatal mistake of jumping into entrepreneurship without proper financial planning. There are numerous financial planning mistakes entrepreneurs should avoid — each one can lead you down the road to financial ruin and hinder a sustainable and scalable growth essential to the long-term success of your business.
According to the best personal finance podcast in the Philippines, committing the most common financial planning mistakes means having a higher chance of your business failing during the first few years of operations, whether due to cash flow problems or failing to define your goals in the first place. So how can you make sure you’re being smart about your business’s money? Below we’ve rounded up four financial planning mistakes entrepreneurs should avoid.
Not Defining Your Financial Goals First
Most business owners have a goal to grow to fulfill their dreams, provide for their families, or simply experience the finer things life has to offer. However, everyone also tends to focus on growing on their money alone. They don’t ask why they want to grow their money in the first place.
As an entrepreneur, it is imperative to think about the future. So setting financial goals is the first thing you should do when you begin your journey towards wealth and financial freedom.
Think about it. You might want to be able to buy a house, a car, pay for your family’s expenses, etc. When you become specific and write down your goals, you can start planning how to achieve them, identifying what steps you will take.
Forgetting To Set Up An Emergency Fund
Every business will face unexpected financial hurdles along the way. Most startups set themselves up for failure when they don’t have or misuse their capital. That being said, it’s imperative that you have a contingency plan. One of the most common financial mistakes entrepreneurs should avoid is forgetting to set up an emergency fund. It is recommended that your emergency fund should be large enough to cover up to 3 months of operating costs without having to incur debt.
It may seem challenging to establish a significant amount of savings for your business. However, having one helps you anticipate unexpected financial problems and also teaches the basics of business budgeting. You can also try to put money away into the emergency fund as soon as you receive revenue.
Failing To Separate Business Money With Personal Money
Entrepreneurs also make the mistake of mixing personal and business funds. While it may be tempting to make personal purchases using your business money or vice versa, doing so can leave your business at risk for financial problems in the future.
For one, it will make keeping an accurate record of your accounts more complicated, which becomes a bigger problem during tax filing periods and when setting financial goals. You might find yourself spending too much time, money, and energy while going through all the receipts and bank statements to separate the two funds.
A smart way to separate your business money from personal money is by opening two separate accounts for each one. Doing so will not only help you keep track of business expenditures, but will also provide you a breakdown of your business’ earnings.
Immediately Making Big Business Purchases
When you have a new business, it’s understandable to want all the trendy office equipment and state-of-the-art software thinking they can grow your team. However, immediately making big business purchases can also offer very little value to your bottom line.
Think about your business purchases carefully. Some expenses like building a website are considered essential, but luxurious team-building trips may not be needed to help you generate revenue in the short term. Focus on growing your business first and accumulating a bigger amount of disposable cash before making big-ticket purchases.
In this article, we’ve rounded up four financial planning mistakes entrepreneurs should avoid. While it’s true that even the smallest financial situation can cause a business to fail, you can stay informed and take steps to avoid them. Identify your financial goals, save for emergencies, track your expenses, and keep the lines between business and personal funds clear.
Need more finance tips? Tune in to the best personal finance podcast in the Philippines — the Leadership Stack. As the podcast for entrepreneurs by entrepreneurs, we invite speakers from all over the world and all kinds of industries who can provide insightful finance tips for leading your business better! Click here to start listening now!