Guest post by Elena Stewart
Mistakes are inevitable when you’re doing anything for the first time, whether it’s starting a new job or trying your hand at a DIY project. But for first-time entrepreneurs, the wrong mistakes can cost more than a little time and money — they could put your entire financial life at stake.
While some entrepreneurs are comfortable taking an all-or-nothing approach, most people prefer to build a business without risking everything. But how? The first step is avoiding these five costly mistakes.
Quitting your day job too soon
Building a business takes time and focus, so it’s only natural you’d leave your full-time job behind when becoming an entrepreneur, right? Wrong!
It’s true you can build a business faster without a day job competing for attention, but quitting too soon is a risky move. Not only do 20% of businesses fail in the first year, but it takes several years to become profitable even if your business survives. In the meantime, do you know how you’ll pay the bills?
A day job gives entrepreneurs something to fall back on if their business idea flops. It’s also an important source of income and cash flow. Instead of quitting your day job, take advantage of your financial security to validate your business idea and strategize for smart growth.
Operating as a sole proprietorship
A sole proprietorship is the simplest structure for establishing your business and paying taxes. Unfortunately, taking the easy route could cost you.
As a sole proprietor, there’s no distinction between yourself and your business. On one hand, that means you don’t have to worry about paying corporate income taxes. On the other, you could lose everything if your business runs into financial trouble.
To avoid personal liability for business debts, form an LLC. An LLC is easy and affordable to form compared to corporations and provides a number of benefits including limited liability and pass-through taxation.
Funding a startup with savings
Even with limited liability, you could still lose everything if you drain your savings to start a business. While avoiding debt may seem like a smart move for first-time business owners, tapping your 401(k), IRA, or home equity is even riskier.
Leveraging a day job is the best way to minimize your financial risk when starting a business. If you need cash flow beyond your salary, look to outside investors, crowdfunding, microloans, and small business grants.
Renting commercial real estate
If you’re going to bootstrap your business, you’ll need to keep expenses low. And that means nixing a brick-and-mortar presence until it’s absolutely necessary. Working from home saves thousands of dollars in rent, utilities, and insurance every year.
That’s not a free pass to build a custom home office. While a productive workspace is important, it’s easy to overspend on office equipment you could do without. Use these tips to determine what you need – and what you can skip — in your home office:
- Look for high-speed internet that guarantees uptime. Usually this means buying a business-class plan.
- Set up a cheap phone line using VoIP or an app-based phone service.
- Opt for used office furniture, but invest in a high-quality computer and ergonomic office chair.
- Buy a highly rated, all-in-one home printer for a fraction of the cost of commercial multifunction printers.
- Use open-source and subscription software services instead of buying software.
- Claim the home office deduction when filing your taxes.
Slacking on record keeping
Taking advantage of tax deductions is one of the smartest ways to save money when starting a business, but you can’t claim business expenses if you don’t track them. Unfortunately, it’s all too easy to fall behind on business record keeping when you’re juggling a side business and a full-time job.
Good record keeping is good business, so create systems that make tracking income, expenses, and receipts simple. For most entrepreneurs, that means an accounting app. Luckily, there are a variety of cloud-based accounting software options that cost under $20 a month for very small businesses.
It takes money to make money, but that doesn’t mean you should go all out when starting a business. By using these smart strategies to start and grow your business, you can build a profitable enterprise without putting everything on the line.
Image via Unsplash