Today’s college students aren’t waiting for graduation to become entrepreneurs. Time reports 15 percent of young entrepreneurs started their business while in college, while 23 percent started one as a result of being unemployed. These young firms also account for an astonishing two-thirds of job creation, as the Kauffman Foundation learned.
Starting a business before you don your cap and gown can be exhilarating and profitable experience, but it also has plenty of pitfalls that can trip up even the most savvy of individuals. Recognizing and avoiding these six classic mistakes can help keep your business ambitions alive and on the right track.
#1: Not having a cash reserve on hand
Chances are good your business won’t turn a profit right away, so you should have some sort of cash reserve available. Calculate your monthly expenses and set either five percent of your weekly net pay aside, or put away $100 a week as a reserve. Don’t forget to set aside enough cash to cover your tax obligations. If you have a structured settlement or annuity (which you can learn more about at http://www.annuity.org/process/), you can sell it for a lump sum to quickly create a safe reserve.
#2: Ignoring your debt-to-income ratio
Carrying too much debt in relation to your income can make it difficult to get small business loans. Your back-end debt-to-income ratio, which includes your credit card bills, student loans and other monthly debt obligations, should be 36 percent or lower. You can calculate your back-end ratio by adding up your monthly debt obligations with your housing expenses and dividing the end figure by your monthly gross income.
#3: Making over-investments in the business
Making heavy investments into equipment and inventory can leave your operations high and dry. Instead, find smarter ways of outfitting your business at or below cost. Government surplus auctions are just one way of doing just that.
#4: Mixing business with personal finances
Getting the two tangled up can cause financial headaches during tax time. Keeping your business and personal finances separate not only increases your business’ credibility, it also minimizes your personal liability and helps you manage payments, taxes and other bills efficiently.
#5: Not seeking wise counsel
Going at your small business alone without sage advice could prove devastating in the long run. Tax advisers, accountants and other financial experts can help you stay on top of tax regulations and other possible financial pitfalls. If you haven’t already, you should find a business mentor who’s willing to offer helpful pointers and seasoned advice that comes from years of business experience. You can also find some useful networking opportunities this way.
#6: Leaving yourself without a salary
It’s always important to pay yourself, however tempting it may be to funnel everything back into the business (which goes back to mistake number four). The Small Business Administration suggests setting your salary based on a percentage of your business profits. It’s also helpful to know the average salary for your industry or field.