Becoming an entrepreneur is fraught with risk and reward, the alluring high reward is the potential income, and the ability to scale a business without the trapping of conventional employer hierarchy. On the flip side, the risk is losing all of your time and financial investment. Minimising risk is essential for every entrepreneur, and this begins with budgeting. In this article, we share with you the budget mistakes entrepreneurs fall into the trap of making, and the myths that hold them back from executing smart, educated financial decisions.
Myth: You don’t need a budget as an entrepreneur
Budgeting is a powerful form of financial discipline. While most entrepreneurs enjoy the freedom of their role, where they can liberally switch tasks and objectives as the need arises, creating a budget and adhering to it proves to be outside of the entrepreneurial spirit. However, this is a dangerous assumption to make, especially as entrepreneurs face just as significant risk of financial misfortune as any other business. Assuming entrepreneurs are immune to the risk and therefore don’t need budgeting, is one of the primary factors contributing to entrepreneurial failure.
Mistake: Combining personal and professional finances
You may find yourself working long, exhausting hours, sacrificing your personal life in the process; however, this doesn’t mean your business and personal finances should meet. One of the basics of entrepreneurial accounting is separating finances early. As you establish your business, physically disperse the funds from your personal accounts, designating the business its own account and money. Once the two combine, it’s challenging to accurately keep track of the finances, as well as determining the profitability of the business correctly.
Myth: Cash flow is profit
Money is finally coming into the business, you are selling products, customers are engaging with your services, and cash is reaching your bank accounts. The process is where the assumption originates; the business has cash flow, therefore, the business is now profitable. The reality is that every dollar you make as an entrepreneur isn’t profit. In fact, in the first few years, every dollar the business takes in is usually required for paying bills, loans or acquiring new stock or equipment.
Mistake: Accounting as a second priority
Easily one of the least exciting tasks on the entrepreneur’s worksheet is accounting, and most find themselves avoiding this task regularly. The pitfall of evading accounting is budget blowouts, as the lack of financial understanding means entrepreneurs make wrong decisions that tank the profitability of the business. If accounting isn’t a strength, it’s best to outsource this, especially if you intend to minimise your risk.