4 Poor Money Habits That Are Leading You to Become Business Broke

Many aspiring business owners accidentally get into bad money management habits that can eventually lead them to business bankruptcy. Let’s break down four poor money habits that could lead you to become business broke if you aren’t careful. We’ll also go over ways you can cultivate smart, financially savvy money habits instead.

Bad money habits for your business

When running an entrepreneurial endeavor, it’s easy to pick up bad money habits that can sink your ship before it has a chance to sail. Here are four of the most common ways new entrepreneurs or executives mess up their companies’ finances.

1. Paying too much for office space

There’s no reason to pay for a beautiful office park or other expensive office space if you and your employees won’t use it, especially if you’re just getting started. Don’t invest in tons of company rooms or even an entire building until your startup is well off the ground and turning a profit (or is at least on its way to projected success metrics).

If you have several employees in your company, why not offer them remote work opportunities? Alternatively, consider using coworking spaces or sharing office space with other businesses.

2. Taking out too many loans

Next, be sure that you don’t take out too many business loans or use too many credit cards when paying for business expenses. While it’s true that any startup will have to take out some debt to pay for equipment, materials, and other essentials, taking out too many loans could eventually overwhelm your finances with the interest payments.

Since most startups don’t turn a profit within the first two years of their existence, you’ll need to keep this in mind as you take on additional debt. At the very least, try only to take out loans that require repayment a couple of years in the future. That way, any cash flow can be used to pay off the most important debts ASAP without allowing your interest payments to skyrocket in the meantime.

Keep this in mind when considering fundraising as well.

3. Overspending on inessentials

“Inessentials” will vary from company to company, of course. But for many businesses, these include:

  • Special amenities or perks for employees, like catered lunches.
  • New uniforms every year as you refine your company’s aesthetic and style.
  • Special workplace initiatives and programs.
  • Free things for your company clients.
  • Overzealous marketing campaigns—it’s better to have a small but targeted marketing campaign than spend tons of money on inessential ads that saturate the market.

You can usually avoid this by considering what you spend carefully. But that leads us into our next major money pitfall …

4. Not practicing good accounting habits

Every business, no matter its size or objectives, needs an accounting department. But lots of young entrepreneurs will avoid getting an accountant, or even practicing accounting themselves if they are a one-person show.

But not practicing good accounting from the get-go is foolish, plain and simple. By not practicing good accounting, you won’t have a good picture of:

  • How much money your company really spends on a day-to-day basis.
  • What your real profit margins are, or how much money you truly make.
  • How much longer you can stay solvent in the initial tense years of your business.

In short, not practicing good accounting leaves you blind as you try to navigate the treacherous waters of entrepreneurship.More articles from AllBusiness.com:

How to cultivate good money habits

While these bad money habits are pervasive in entrepreneurial culture, it’s also true that you can cultivate good money habits. Here are a few ways to overcome the above disadvantages, ensuring your company reaches its sales goals and starts generating profit.

Get an accountant

First, hire a professional accountant for your company. Accounting is crucial, so you always know how much money you have. Developing proper accounting procedures also ensures you don’t overspend your money and fall into unnecessary debt.

Sure, hiring an accountant costs money. But the odds are, having a talented accountant among your company’s employees will save you money in the long run. Plus, it will enable you to make wiser financial decisions as your business grows and scales with success.

Make sure the accountant uses good software, of course, that can generate reports like profit and loss statements and other essential documents.

Track all spending

You should track all your company’s spending to make sure you don’t overspend and fall too deep into debt. Many companies become business broke not because they fail to generate revenue, but because they take on too much debt and cannot repay all the purchases they made in their first few years.

By tracking your spending, you’ll ensure that your gradual revenue growth is enough to offset the cost of debt payments and interest, while also making regular purchases of supplies and materials for your products or services.

Invest in your company’s practical output

Lastly, be sure to invest all of your company’s revenue back into things that result in “practical output.” Practical output is best understood as the actual products or services you can later sell for a profit. For example, if your company sells “no medical” life insurance, your business should invest its revenue back into selling more insurance policies, not renovating unnecessary office space or hiring a bunch of unneeded employees to look more productive than you actually are.

By investing in practical output, you’ll shrink the gap between your revenue and expenses and help your business get “in the black” more quickly.

Break your poor money habits

Poor money habits can easily lead you to business bankruptcy if you aren’t careful. That said, it’s easy to avoid going bankrupt if you take the time to consider your business expenses, hire an accountant to help you steer your finances, and try not to overspend on inessential stuff.

Entrepreneurs just like you have succeeded for generations. You, too, can practice good business finances by keeping these tips in mind throughout your business journey!

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