Monday, August 8, 2011

7 common personal-finance mistakes that young entrepreneurs make – and how to avoid them.
1. Overinvesting in the business

To look more professional, young entrepreneurs may spend their savings too freely. Maybe they lease ritzy offices or purchase high-dollar equipment. Overspending on business expenses that aren't absolutely necessary can quickly erode your personal finances, says Alexa von Tobel, founder and CEO of LearnVest.com, an online personal-finance resource for women. It can be easy to burn through your savings before you even have a product or service to sell, she says. That's when young entrepreneurs dig themselves deeper in the hole personally.
Instead, "spend every dollar you have on building a really good product and get it in front of users," von Tobel says. "If your product isn't good, there's no hope for making any progress."

2. Cutting corners on formalities Tips for Business Owners on Retirement Planning

All too often, young entrepreneurs will cut corners on legal and accounting advice, notes Johnson. Maybe they know an attorney or a finance guy so they ask if they might help them get licensed or take a look at their books. But those moves can backfire. "Hire someone who is an expert in the specific field that you need," he says.
One accounting mistake, for instance, can lead to paying far more in personal income taxes than you should. And when personal finances are in disarray, it can scare off potential investors and force you to sink even more of your own money into the business.

3. Not paying yourself

Like Major, young business owners tend to live off ramen noodles and plow all of their resources into their business without removing a dime. While this can help keep cash flowing into a business -- not to mention it can be necessary to fund expansion -- it gets tricky when the business is paying your rent and buying you meals. What to do instead? Pay yourself at least a modest salary to keep your personal finances straight -- and separate -- from the business. And don't go overboard by giving yourself a six-figure salary right away. "You need to leave enough money in the business, so it can operate in lean times."

4. Failing to plan for the worst

"Young people often think they're 14 feet tall and bullet proof," Johnson says. But since they're not, they need to plan for the worst. Create a succession plan and some form of insurance to support the business if you can't run it. Johnson recommends setting up a "revocable trust" -- which, unlike a standard will, helps a company bypass the potentially costly court procedure known as "probate" and establish whom should run the business in your stead.
If you have a partnership and a business that can't easily be sold, Johnson suggests establishing a "buy-sell agreement." This binding agreement governs what happens if a co-owner dies and typically includes an insurance component that provides funding should something happen to either owner.

5. Mixing business and personal assets

Whether it's personally guaranteeing a loan or getting parents to take out a second
 mortgage on their home, leveraging personal assets for business purposes is a personal-finance no-no. If the business sours, creditors can go after these personal assets. "You should only use the collateral from the business, so, if it goes under, you're not liable personally for the loan," says Lynn Mayabb, senior managing advisor at Kansas City, Mo.'s BKD Wealth Advisors.

6. Using personal credit cards for business purposes

Relying on personal credit cards when a bank won't front your business money can also prove risky. Not only can you be tempted to charge things when you shouldn't, mixing business charges with personal ones can wreak organizational havoc. Just think: What if your business ever gets audited? In that instance, you'll need to provide a record of your business expenses going back at least three years. Instead, apply for a business credit card and use it only on necessary business expenses.

7. Raiding the company’s coffers

If you have two or three months of outsized sales, young people in particular tend to become overconfident, says Mayabb. Being inexperienced, they start spending the business's cash flow indiscriminately. Perhaps they need cars, so they buy the best ones on the lot only to find the next several months at their businesses aren't nearly as successful. "I've seen people drain their businesses this way," says Mayabb.

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