Are you planning to start a business? Consider hiring a financial expert like Savvy Financials to assist with your business’s financial needs. A financial expert can help you avoid mistakes commonly made during the startup phase.
Read on to discover more information. After going through this blog post, you should be well-equipped to make an informed decision when hiring a financial expert and, in turn, steer clear of the following mistakes often encountered when starting a business.
Here are common mistakes that can happen when launching a business:
Neglecting to Prepare a Business Plan
When starting a business, it is crucial to create a business plan. A business plan is a comprehensive document outlining your business goals, ideally covering the next 3 to 5 years, and may include financial projections. This plan details how you intend to achieve your goals, and neglecting to create one is a critical error.
A well-structured business plan not only guides your business but also serves as a vital tool when seeking investments or loans. It should encompass a business description, details of the products or services you will offer, market analysis, and competitive research on other market players.
Inadequate Startup Funding
Insufficient startup funding is a huge reason for business failures. For a business to thrive, it requires adequate funds to initiate operations. It’s crucial to be well-prepared with ample financial resources before embarking on a business venture, prompting many startups to seek investors or secure a bank loan. Determining the required amount of money to start your business is a critical step.
To assess the necessary funds, a comprehensive business plan is indispensable. The business plan should provide an estimate of the startup costs, outlining the financial support required from investors or the bank. This strategic document plays a pivotal role in securing the essential funding for a successful business launch.
Securing the necessary funds is typically a challenging step, so consider the following strategies:
- Utilize Your Salary: If you’re considering starting a business while holding another job, allocate a portion of your salary to fund it.
- Tap into Personal Savings: If you have personal savings, consider using them to give your business a financial boost.
- Explore Loans: Consider obtaining a loan to cover the funds needed for your startup.
- Dip Into Retirement Savings: If you’ve saved up for your retirement, think about allocating some of that money to your new company.
- Credit Cards: In some situations, you can use credit cards to cover initial costs when launching the company.
- Attract Investors: Actively seek investors interested in supporting your business.
- Online Crowdfunding Campaign: Consider launching an online crowdfunding campaign to gather financial support for your business.
Neglecting Business Records
When launching a business, it’s crucial to monitor both income and expenses. While maintaining accurate company records can be time-consuming, it is absolutely essential. These records serve as documentation for tax deductions during tax payments.
Accurate business records also act as a safeguard in case of an IRS audit. They enable you to demonstrate the precision of your reported income and expenses on tax returns.
Providing clear records is vital to convince auditors of the accuracy of your information. All receipts for expenses and income must be readily available. Seeking the assistance of financial experts like Savvy Financials can facilitate the effective maintenance of your business accounting records.
Using a Personal Bank Account for Business
When establishing a business as a partnership, LLC, or corporation, it is imperative to create a separate bank account for the company. For sole proprietors, who own all business assets and earnings, opening a distinct bank account is strongly recommended.
A separate business account ensures effective management of business income and expenses without commingling personal funds. Deposit all forms of income, including checks, cash, and digital payments, into the business bank account for business-related transactions.
While various payment processors can be utilized, it’s essential to ensure that all funds are deposited and deducted from the dedicated business account. Avoid using this account for personal expenses and vice versa.
Utilizing a separate business bank account can offer several advantages:
- Efficient Financial Tracking: You can easily monitor the income and expenses of your business, avoiding any confusion between your personal and business funds.
- Audit Preparedness: In the event of an IRS audit, having a dedicated business account allows you to present a clear record of all financial transactions associated with your business.
- Legitimacy Confirmation: A separate business account demonstrates to auditors that your business operations are legitimate and conducted independently.
- Contractor Status: It helps in establishing your status as an independent contractor rather than being classified as an employee.
Not Setting Money Aside for Taxes
Yes, that’s right!
Neglecting to allocate funds for taxes is a crucial oversight when running a business. Unlike when you were an employee, responsible for tax withholding, having your own business means you need to manage all your taxes independently.
Every time your clients purchase your products or services, no taxes are automatically deducted. Therefore, it’s imperative to set aside a portion of your earnings to cover your tax obligations to the IRS. Failure to do so may result in a significant tax bill in April, posing financial challenges.
To manage this, consider opening a separate bank account dedicated to tax savings. Regularly deposit a percentage of each payment received from customers to accumulate sufficient funds for tax payments. The specific amount to set aside will depend on federal and state income tax brackets, factoring in potential deductions.
A common practice is to reserve approximately 25-50% of your profits. Should you deposit more than needed, the excess can be utilized for essential business expenses or future financial commitments.
If you’re embarking on a business venture, seeking the expertise of a financial professional, such as Savvy Financials, is crucial. With over 11 years of experience, Savvy Financials offers a range of financial services, including accounting, bookkeeping, consulting, financial advisory, payroll services, and taxation. For inquiries about our services, feel free to reach out to us through our contact form. Don’t hesitate—choose Savvy Financials to meet your company’s financial needs promptly.