7 terrible money mistakes most entrepreneurs make and how to avoid them

 

  • Not estimating the cost of take-off properly

There is more than what meets the eye!

Starting up a new venture doesn’t only mean getting basic infrastructure, spending on marketing and hiring a team. Costs include compliance costs, cost of mistakes in early days and most importantly the cost of keeping basic lifestyle expenses of the family going, till such time the business starts paying enough. Although successful businesses pay this back many times over, only a few survive this error.
To avoid this, start-up businesses should take help to estimate realistic costs from seniors in the industry or professional planners. Set out a business plan before cutting that ribbon.

 

  •  Not paying self enough

The business owner is the cheapest labour.

New entrepreneurs treat the business like another baby – something on which they would spend indiscriminately without expecting anything in return! They fail to price their time and contribution sufficiently well to make their products affordable for clients. Over time, they (their families) start thinking that they would have been better off, in just another corporate job. This blows the death knell to the ideas, confidence and success of the entrepreneur.
To avoid this error, doing a fair calculation of your cost (using basic opportunity costing methods) and building it in the price of the product / service will ensure motivation and wealth creation.

 

  •  Not segregating business assets and own assets

That that expense.. that that place!

Mixing up business and personal expenses, drawing money at random, using personal assets for business use have been the undoing of many a business owner. Many successful corporate executives quit well-paying jobs when they have accumulated assets, to lose it all in a business that doesn’t clearly demarcate personal and business cash flows and assets.
To avoid this error, business owners should take a regular salary and not withdraw cash at whim from the business. They should build personal assets that are locked away or in the name of family members so that it is at least one step away from easy access.

 

  •  Counting on valuation of business as the only wealth creation way

‘I will sell my business for a good valuation and retire with the money’ say many a business owner. They fail to realise that not all businesses are saleable. Most service-based businesses have no value if the promoter exits the business. A good price for business could buy you the yacht or the farm house on the seashore. Business valuation can be a cherry on top of the cake, it can’t be the bread and butter of the retirement plan.

To avoid this –  have a realistic evaluation of the limitations and possibilities of the business. Plan to be financially independent, independent even of the business.

 

  • Letting emotions and passions make decisions

Passion drives businesses.

Passion is an essential element in the kickstart and early growing stage of any business. But passion has a flip side – the blur of the rational. When key decisions like team hiring, cost cutting, business expansion etc are passion driven – that is a super recipe for disaster. Passionate businessmen trust easily. They sign the dotted line without much thought and that is never a great way to build a business.
To avoid this – have a team member who is more left brained, rational, cautious and methodical. Respect this team member and take all decisions after open minded discussions.

 

  • No diversification

All eggs in one basket

Many entrepreneurs have all their income coming from the business, all their assets belong to their business, all their profits are ploughed back into the same business. They keep no fall back. The comforts of the  family that made a lot of sacrifices in the initial stages of building business is compromised by this folly. The business may be an excellent business, having all eggs in one basket is never a smart idea.
To avoid this – When business does well, remove some part of the profit and create personal assets in unrelated avenues. That way, a healthy diversified asset base will hold the ship in good stead.

 

  • Believing that business is permanent and well in control 

That feeling of invincibility!

Many business owners believe that everything in the business is controlled by them. That nothing can really go wrong under their watch. They throw caution out of the window and do not appropriately risk-proof their business. COVID has been a wake-up call for many of those businesses.
To avoid this – Nothing really can be done to avoid this. Life itself will teach lessons and when it does, don’t forget it. Or learn from other’s mistakes (like you are reading this article) and be aware, stay alert and thrive.