Any business that is newly forming will need plenty of time to sort out its finances. It takes dedication and a watchful eye to make sure than spending is done wisely and funds are being allocated in a productive way. When you're just starting out as an entrepreneur, though, it can be difficult to know exactly how to budget for your business's best interests. And, there are many simple mistakes that new business owners make that can lead to major financial issues.
Here are some of the top reasons small businesses go into debt and how to avoid them:
1. Doing too many business deals early-on
It may seem like the smartest thing to do, but doing too much business too soon can place a start-up on the road to financial disaster. It takes a while to get profits going when you first start out, and it also takes time to recognize patterns in revenue. Just because business is booming during your first few months doesn't mean it will remain consistent for the next few years. If a small business stretches itself too thin by making purchases is can't really afford or by taking on more clients than it can handle, there could be potential for debt in the future when available funds cannot meet the needed work flow.
2. Mismanaging employees
One of the largest expenses a business will make is in hiring and keeping employees. The employees are the essence of a business and the only thing that keeps it running. So, if those resources are mismanaged, businesses can end up losing thousands of dollars that they could have put toward more productive goals. Mismanagement of employees includes not pushing employees to do their best work, hiring too many managers, or hiring too few workers. It is essential to get this combination just right to really balance profits with expenditures and avoid falling into debt.
3. Spending too much on non-vital purchases
Every new business will want at least a few bells and whistles. If you have a physical office, it's nice to furnish it with items that will keep employees comfortable, like nice couches, televisions, or snacks. It's also a good idea to provide employees with high-quality technology so they can get their work done in the most efficient way possible. As a business owner, showing appreciation to employees in this way is always a good thing to do. But, it's also important to not go overboard. If you're just starting out, keeping purchases just above bare minimum is probably the best way to go. In short, if you don't absolutely need it, don't buy it.
4. Failing to keep detailed financial records
The easiest way to get yourself into debt is by not keeping track of your money. Never rely on one employee to account for your profits and expenditures. Try to keep very close tabs on every aspect of your budget for the first few years. Businesses that make small purchases and fail to record them until the end of the term can end up with much less assets than they thought they were working with. And, in the worst case, could end up going into debt before they realize what's truly happening.