8 Money Mistakes Small Businesses Make During the First Year

The first year of a new business is challenging, and it’s easy to make money mistakes that could be fatal. Although the specifics vary from industry to industry and region to region, data compiled by the U.S. Bureau of Labor Statistics states that on average, about 20% of small businesses fail in the first 12 months.

The first year of business can make or break a company. 

A lot of moving parts go into how well or poorly a new business operates. Many of them involve how you handle the fledgling business’s finances. Here are eight vital money mistakes new businesses often make. 

• Agreeing to too much lease
• Buying big for the business
• Raising money too quickly
• Commingling business and personal funds
• Not paying quarterlies
• Not having a budget
• Financing with a credit card
• Spending far too little

8 First-year money management mistakes

1. Agreeing to too much lease

This mistake comes in two species: 

• A lease of reasonable length for more space than you need
• A lease for suitable space for longer than you need

The first is a mistake because you’re locked into paying more than you should in hopes you’ll expand to fill the space quickly. The second is a mistake because you’ll be stuck in the lease for potentially years after you’ve outgrown it.

Don’t even get us started on leases that make both mistakes at once. 

There’s lots of temptation to get too much lease for your new business. Bribes like reduced rent, free rent for your first months, improvements or modifications to the property and others aim to get you to buy more than you need for longer than you want.

What to do instead

Find the space with just slightly more room than you need. Negotiate hard for the shortest term, and ask for all those long-lease benefits anyway. It’s not like they’ll raise your rent just for posing the question.

Pro tip: Start in a business park with lots of spaces in different sizes. In most cases, the landlord will let you move to a larger area with no hassles or extra charges, so you can expand your lease when—and only when—your business needs it. 

2. Buying big for the business

When you start operations, it’s only natural to want all the best for your business: flashy new laptops, a posh office and employees who make your competition jealous.

This kind of front-loading can kill a business by sinking too much of its startup funds into unnecessary purchases. Worse, it can give you a false sense of success and security before you’ve done the work and made the headway to breathe a little easier. Make sure you 

What to do instead

Stick to only the expenses you need to run your day-to-day operations. Spare little or no cost for your industry’s essential tools, like your point of sale system, but set the others as rewards for a great quarter or year. Be especially wary of ego-driven expenses like a fancy launch party, team-building retreat, or tech you only need for the sake of showing off.

Pro tip: For every business that opens, at least one is closing. These shops can be excellent sources of office equipment, decor, computers, furniture and similar startup gear at a fraction of what you’d pay to buy it new.

3. Raising money too quickly

If you’re going the venture capital route, getting too much funding too soon can be a problem for several reasons:

• You can be tempted to splurge as described above, only to find yourself cash-poor down the line
• Every investor is a new person with opinions about how you do business. Too many investors are like too many chefs: They can spoil things quickly
• In the first year of business, you’ll learn things and find opportunities you never imagined in the planning stage. Raising and spending early leaves no room to make those adjustments.

Finally, your business could turn out to be successful enough you didn’t need some venture capital. That means your investors will own more of the company than necessary, cutting into your profits every year.

What to do instead

Set up a staged series of funding drives. Start with enough to get rolling, then peg the others to specific expansion opportunities. If you need the funds, you’ll know how to get them. If you don’t, you can move forward using just the profits. 

Pro tip: Make it clear from the beginning how much money will go toward your salary and reinvestment into the company during that first year. Investors should not expect to see profits in the early months. 

4. Commingling business and personal funds

Commingling your funds makes it harder to tell how your business is doing. With money flowing through both personal and business accounts, you can either feel you don’t have funds for expansion and marketing or that you’re doing better than you are because your spouse is bringing in plenty from a job. 

The second reason you shouldn’t commingle your funds is that it can confuse the IRS. Even if you’re honest with your reporting—which you should be—they might decide a loan from your mother is business income or a computer you bought with your credit card counts as a personal expense.

What to do instead

From the start, keep your business and personal funds separate. It can be extra work in an already busy year, but it’s an absolute must. Build the habit early and maintain it going forward. 

Pro tip: Even if you’re a solo business and haven’t incorporated, set up a separate personal checking account and get a new credit card, and only use those for your business expenses.  

5. Not paying quarterlies

Once per quarter, you have the opportunity to estimate your annual tax burden based on the quarter’s profit and loss, then pay it in advance. If you don’t take that option, you run two serious risks:

• If you owe tax at the end of the year, you can be charged interest and penalties for not paying your quarterlies
• If you don’t pay your quarterly taxes, it can be easy to end up with a surprising tax bill at the end of the year, which you might not have cash on hand to cover

What to do instead

Calculate and pay your quarterlies. This is one of the more straightforward tips on this list, although doing it is far from simple. Depending on where you live, this might be necessary for state and local taxes, as well as for your federal responsibility. Check with your accountant to make sure. 

Pro tip: Even if you’re likely to lose money on paper in your first year of business—and many companies do—file a quarterly tax report showing why you owe zero dollars. It gets you in the habit and checks your math.

6. Not having a budget

It might be possible to steer your business without a clear financial plan. But without at least a rough estimate of how much you’ll bring in and how much it will cost to get it, you’re planning nothing but how to fail.

A clear plan based on your best information and estimates is vital to move your business toward profitability. It’s even essential when your estimated income is zero. Without a budget for that, you won’t know how long you have before you start making money.

What to do instead

Avoid this money mistake by setting a handful of staged budgets, one each for different levels or stage of your first year in business. Have one for the month before opening, one for after your second product launch and so on. Move between them as circumstances necessitate. 

Pro tip: More than one industry association helps estimate expenses (and probably income) for new players in their field. It’s one of many reasons why these memberships can pay off. 

7. Financing with a credit card

There will come times in your business’s lifecycle when you need more money than you have on hand. At those times, business owners with enough credit often make the mistake of using their credit cards to make up the difference. 

The comparative interest rates on credit cards versus almost any other source of funds means you’re paying far too much for that money. At best, your profits cover the cost quickly and you lose vital earnings in the first year. At worst, the balance stays put for months or years, accruing interest and increasing the amount of profit you need for your business to support you. 

What to do instead

Using credit cards for business purchases usually happens because the business owner is in a hurry. They got caught by surprise and have to make up the funds on notice that’s too short to secure a loan or find extra investments. Avoid it by staying on top of your estimates and watching the horizon for upcoming opportunities and expenses.

Pro tip: If you can set up a business line of credit early and at good terms, it can have a credit card’s flexibility with the terms of a regular loan. Look into this product early, and have the funds ready long before you need them.

8. Spending far too little

We know we’ve given the opposite of this advice a couple of times in this article, but this flip side is equally valid. Yes, you want to minimize expenses, but you don’t want to do so at the cost of your long-term success. 

Flashy and tempting extras can wait until you’ve made it or you grow out of needing them at all. Large spaces and necessary equipment can wait until your business is ready to sell the things they allow. The longer you can put off those purchases while your business thrives, the better your chances for success will be.

Other expenses, however, can set your business on a faster trajectory to success. The right marketing, investing in salaries for excellent staff, making superb customer service possible, and creating spiffy customer-facing lobbies or websites are some of the things that could be worth the investment for your business.

What to do instead

Know what investments will give you a great return and budget for them. The earlier you make them, the faster you can turn those investments into profit. 

Pro tip: This is another place where membership in industry associations can be beneficial. The people they can put you in touch with know from long experience which early expenses can be put off for later and which ones make the difference in those first crucial months. 

Final thought: Your second year

Although we could do a whole other article on the biggest money mistakes of the second year in business, here’s a quick peek at six of the most common:

• Expanding before your company is ready from top to bottom
• Moving into larger spaces before your profits justify the growth
• Increasing the owner’s salary too quickly, too soon
• Not saving enough aside for that first big expansion, which can cost you opportunity and profits
• Scaling back on marketing spends before your brand has achieved saturation
• Not holding a second venture capital round because you think you can make it on your own

You don’t have to worry about these money management mistakes yet, but keep them in the back of your mind. Some of the decisions you make in the next few months might make them easier to avoid.