Top 7 Financial Mistakes I See Founders Make When Starting Their Business

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Starting a business can be exciting, but it can also be stressful, scary and, at times, completely overwhelming. For a lot of new founders, one of the biggest sources of that stress is the finances.

What taxes do I need to pay? Should I set up a limited company? How much should I charge? Do I need a separate bank account? And what on earth is cash flow?

If you've found yourself asking questions like these, you're definitely not alone.

My name is Lewis, and I help founders grow their businesses by providing practical financial and technology solutions, so they can spend more time focusing on what they do best — growing their business.

Today, we're taking a beginner-friendly look at seven financial mistakes I regularly see founders make when starting a business — and, more importantly, how you can avoid them.

1. Setting up with the wrong business structure

One of the first decisions you'll make is how to structure your business.

You might operate as a sole trader, set up a limited company, form a partnership, create a Community Interest Company (CIC), or choose another structure depending on what you're trying to achieve.

Your business structure can affect a lot more than the name on your paperwork. It can influence your legal responsibilities and protections, how you take money from the business, the taxes you may pay, your reporting requirements and even the types of funding you may be eligible for.

The good news? This is a mistake that's relatively easy to avoid.

Before setting up, consider speaking to an accountant about your circumstances. Many accountants offer an initial consultation free of charge, and taking advantage of that conversation could save you a lot of time and hassle later.

There isn't one "right" structure for every business — but there may be a right structure for YOUR business.

2. Starting without a business plan

When you've got a great idea, it can be tempting to jump straight in.

Website? Check. Logo? Check. Instagram account? Check.

Business plan? We'll come back to that...

Unfortunately, skipping the planning stage can be a costly mistake. Without a clear idea of where you're going, it's easy to waste time and money on things that don't actually help the business grow.

Your business plan doesn't need to be a 50-page document filled with complicated charts and corporate jargon. But you should be able to answer some important questions.

A good business plan should cover things such as:

• What does your business actually do?
• Who are your customers?
• What problem are you solving for them?
• Who are your competitors?
• How will you reach your customers?
• How will the business make money?
• What will it cost to operate?
• How much money do you need to get started?
• What are your goals for the next 12 months?

3. Poor cash-flow management

In my opinion, this is the big one.

A business can be profitable on paper and still find itself unable to pay the bills.

Cash flow is simply the movement of money into and out of your business.

Money comes in when customers pay you. Money goes out when you pay suppliers, wages, software subscriptions, rent, taxes and all the other costs involved in running your business.

The problem is that those two things don't always happen at the same time.

You might complete a £5,000 project today, for example, but if your customer doesn't pay the invoice for another 60 days, that £5,000 isn't sitting in your bank account ready to pay this month's bills.

And yes, sometimes that means chasing a customer for the third time to pay an overdue invoice. If it hasn't happened to you yet... give it time!

That's why keeping an eye on your cash flow is so important.

At a minimum, you should understand:

• How much cash you currently have available
• What payments you're expecting from customers
• What bills and other payments are coming up
• When those payments are due
• How long your current cash will last

You don't need a complicated financial model when you're starting out. Even a simple cash-flow forecast can give you a much clearer picture of what's coming.

4. Mixing your personal and business finances

When you start your business, I strongly recommend keeping your business and personal finances separate.

Why?

Because 12 months from now, you really don't want to be scrolling through hundreds of transactions trying to remember whether that £47 Amazon order was printer ink for the business or something you bought for the house.

Keeping things separate makes it much easier to track your business spending, understand how the business is performing and prepare your records.

It can also make life much easier if you eventually work with an accountant or bookkeeper. If they have to spend hours separating personal transactions from business expenses, you may end up paying for that extra work.

Depending on your business structure, having a separate business bank account may also be a practical or banking requirement rather than simply a nice-to-have.

Fortunately, opening one is generally straightforward. Many providers allow you to apply online, and some accounts also include useful extras such as bookkeeping integrations or access to business support.

The important thing isn't necessarily which provider you choose — it's getting into the habit of keeping business money and personal money separate from day one.

5. Not putting money aside for tax

VAT. Income Tax. National Insurance. Corporation Tax.

Taxes have a habit of appearing everywhere when you run a business.

When you're employed, much of this happens behind the scenes through payroll. When you start running your own business, you become responsible for understanding which taxes apply to you, keeping appropriate records and making sure there's money available when payments are due.

One mistake I regularly see new founders make is looking at the balance in their business bank account and assuming all of it is available to spend.

Then the tax bill arrives.

A simple habit can make a huge difference: start putting money aside for tax as you earn it.

Consider having a separate savings pot or account specifically for future tax payments and regularly moving money into it.

How much you need to set aside will depend on your business structure, profits and individual circumstances, so this is another area where speaking to an accountant can be worthwhile.

The key point is simple: don't wait for the tax bill to start thinking about how you're going to pay it.

6. Underpricing because you don't know your numbers

Pricing is difficult, particularly when you're just getting started.

A lot of founders underprice themselves because they're worried customers won't pay more, they're comparing themselves with established competitors, or they simply don't feel confident charging what their product or service is worth.

But there's another common reason: they don't actually know how much it costs them to deliver what they're selling.

Imagine charging £100 for a service.

Sounds good.

But then you've got software costs, insurance, marketing, travel, payment processing fees and four hours of your time involved in delivering it.

Suddenly, that £100 doesn't look quite as attractive.

Before setting your prices, spend some time understanding your numbers.

Work out your direct costs, your overheads and how much time goes into delivering your product or service. Then combine that information with some market research.

What are competitors charging? What does your ideal customer expect to pay? And, importantly, can you actually make a sustainable profit at that price?

You don't have to be the cheapest option.

Your price needs to work for your customers — but it also needs to work for your business.

7. Poor invoicing practices

You've done the work. Your customer is happy.

Now you need to get paid.

It sounds obvious, but poor invoicing processes can cause serious cash-flow problems for small businesses.

Invoices that are sent late, contain incorrect information or don't clearly explain when and how the customer should pay can all delay money reaching your account.

Try to create a simple invoicing process from the beginning.

Send invoices promptly, clearly state your payment terms and due date, make it easy for customers to understand how to pay you, and keep track of which invoices are still outstanding.

Most importantly, don't be afraid to chase overdue invoices.

You aren't being rude by asking to be paid for work you've already completed.

Accounting and invoicing software can automate a lot of this for you, including recurring invoices and payment reminders. Even if you're only sending a handful of invoices each month, putting a good system in place now can save you a lot of admin as the business grows.

Final thoughts

Starting a business means learning a lot of things very quickly, and nobody gets everything right from day one.

The aim isn't to become an accountant overnight.

It's to put a few good financial habits in place early so that you understand what's happening in your business and can make better decisions as it grows.

If you take nothing else away from this guide, remember these three things:

Know your numbers. Keep an eye on your cash. Ask for help when you need it.

Getting those foundations right can save you a lot of headaches later.

And if finance still feels like the part of running your business you'd rather not deal with, that's exactly where Forge Solutions can help.

This article provides general information and isn't intended to be individual financial, tax or legal advice. Your circumstances may be different, so consider speaking to an appropriately qualified professional before making important financial or business decisions.

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