Five Financial Traps All Businesses Must Avoid

Going into business involves risk and making some mistakes. While an error in judgment may provide a valuable learning experience, there some situations that can be avoided, especially when it comes to money. The following list outlines five financial traps all businesses must avoid in order to be successful.

Mismanaging Finances

Most businesses fail because the money runs out. Unexpected expenses can and do occur as a company finds its footing, and it is common practice to charge those expenses to a credit card. Unless the balance is paid off each month, the interest charges build quickly and cut into the bottom line. A good way to avoid this is to have a margin of error built into the budget and have a cash reserve on hand for emergencies. Understanding recurring expenses and being prepared will keep a company out of the credit trap.

Mixing Funds

New businesses can fall into the trap of using business credit for personal expenses. This is not only a bad idea from a practical perspective, it can be problematic when tax time arrives. Business and personal accounts should be kept separate. This gives a clearer picture on expenses and protects personal assets should the business fail.

Choosing the Wrong Partner

A business partnership is not all that different from marriage. For long-term success, the right partner is the result of careful choice and proven character. The foundation is built through trust, which means getting everything in writing. If the partner is not known well, a small collaborative project is a good starting point to gauge intent and financial stability. There is a great deal of money involved in starting a business, and the wrong partner can cause ruin from which it is difficult or impossible to recover.

Building an Expensive Website

The digital world requires a business to have a web presence. Many companies fall into the trap of investing a large amount of the budget into a complex website that may not fit the needs of the business. There are also expenses after the fact such as security and upkeep that may require outside expertise. The company’s goals should be considered before making plans for a website. In most cases, a simple, functional and attractive site can be built for $2,000 or less. Unless a business requires a highly secure site with many different features, it should stick with a basic web presence.

Hiring the Wrong Workers

Without competent staff, a company will quickly collapse. Good employees have the ability to multitask, think quickly in different situations and perform well under pressure. Bad hires happen because expectations are not clearly outlined or the person is not qualified to perform at a certain position. This is a costly mistake if it happens repeatedly, and it is easily avoided by careful evaluation before offering full-time hours. This can come in the way of part-time work or small projects to see if a new hire is a good match. Hiring the best talent at the start is another option, and a high salary requirement can be negotiated down through the offering of paid time off, equity and other benefits.

Starting a business is an investment of time, hard work and patience. Following the tips above will help entrepreneurs stay away from common financial traps.

 

Jessica Kane is a professional blogger who focuses on personal finance and other money matters. She currently writes for Checkworks.com, a leading supplier of personal and business checks.

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