First-generation entrepreneurs are a diverse bunch. Some start their business because it’s something they’ve always dreamed of doing or perhaps they were tired of dealing with a demanding 9 to 5. Whatever their motivation and regardless of business type and industry, one thing unites them – they are the first in their family to start their own business.
As inspiring as that is, unfortunately, this means that they often cannot draw on the guidance or experience of others in their family. Additionally, very few entrepreneurs have business backgrounds or specific education or training in setting up and running a business.
It’s no wonder that first-generation entrepreneurs make many mistakes, especially around their finances – simply because they don’t know better. As a first-generation entrepreneur myself, I want to make sure my fellow first-gen entrepreneurs avoid these mistakes. In this article, I’m sharing the top five financial mistakes first-gen entrepreneurs make, and how you can avoid them.
Not Keeping Complete and Accurate Records
Recordkeeping is something that often trips up first-generation entrepreneurs. As a tax professional, I have seen this with hundreds of different first-gen entrepreneurs.
Many entrepreneurs, especially when starting their first business, dive straight in without understanding the requirements and obligations of running the business. Inevitably, they get caught up in the day-to-day of their business activities and neglect to keep complete and accurate records.
Solution: Implement systems to keep track of finances
Put systems in place in your business to make recordkeeping a cinch. When you first start out, you can use a simple spreadsheet to record all your financial transactions. Keeping them organized according to the type of expenses can help you stay on top of your finances. You may want to set aside 30 minutes a week to update this spreadsheet to make sure you don’t overlook or forget to record any relevant transactions.
As your business grows, consider using an accounting software that automates this process and reconciles transactions with your bank account. Quickbooks (*affiliate link) and Wave are some popular options among first-generation entrepreneurs.
*Affiliate link disclosure – if you use this link to make a purchase, we earn a small commission at no additional cost to you.
Not Planning for Taxes
This is a big mistake that first-generation entrepreneurs make and it can be the source of a lot of stress, worry, and financial distress. As an employee, your taxes are immediately deducted from your salary. However, as a self-employed business owner, you are responsible for setting aside the funds necessary to pay your taxes.
This is something first-gen business owners do not consider when managing their business finances, resulting in a huge shock at tax time when they realize they owe the IRS a large sum of money that they had not accounted for. They may also be penalized by the IRS for underpaying their taxes if they have not planned for taxes throughout the year.
Solution: Set aside cash to pay your taxes monthly and make quarterly estimated tax payments
Planning for your taxes can be as simple as setting aside a percentage of your profits each month for taxes. By putting away money for your taxes in a separate bank account such as a business savings account, you can be confident that you will not be in a financial crunch when it’s time to pay taxes.
Be sure to also make quarterly estimated tax payments on time. If your total tax bill for the year is likely to be over $1,000, you need to make quarterly estimated tax payments or risk getting penalized by the IRS for underpaying your taxes. Not sure how much you need to set aside? Check out this article for more information.
Pro-tip: Avoid overpaying taxes by planning ahead with a tax professional. When you work with a tax specialist like Exceptional Tax Services, you get detailed personalized advice on how to save on taxes by implementing tax-saving strategies during the year!
Not Understanding the True Cost of Doing Business
Running a business is not cheap. There are many “hidden” costs of doing business that you may not have anticipated as a new entrepreneur. From the cost of incorporating your business to paying for Google Workspace, from your Zoom subscription to purchasing your website domain – the expenses can add up.
Whether it is a one-time payment or a monthly or annual cost, these are all expenses that make up the true cost of doing business. When a first-generation business owner fails to take into consideration the true costs of doing business, it can result in a lack of funding for necessary expenses, cash flow problems, and more.
Solution: Work with a trusted mentor or financial advisor
Find a mentor who can guide you through the pitfalls of entrepreneurship that you need to be aware of and provide advice on how to navigate them. A financial advisor with experience in working with entrepreneurs may also be able to offer support and tips that will allow you to build a sustainable business.
If you are looking for support, the House of CEO Membership will provide you with the necessary guidance on setting up a solid foundation for your business.
Not Budgeting in the Business
There are very few people who enjoy budgeting, but it is a necessary part of building a successful and sustainable business! Not having a fixed budget is one of the top mistakes that first-gen entrepreneurs make.
Without a budget to guide your spending in your business, it is easy to fall into the trap of spending more money than you make or conversely, not setting aside enough to invest in the growth of your business. This may result in racking up debt in your business or stunting your own business growth because you do not have enough set aside to hire help or pay for processes that will make your business more efficient and productive.
Solution: Implement the 50-30-20 Money Framework
This problem is an easy fix. Simply implement a budgeting system that can help you keep track of how to allocate your financial resources. I recommend the 50-30-20 Money Framework as an easy yet effective system for first-generation business owners.
The 50-30-20 Money Framework is based on using 50% of your profits to pay yourself, setting aside 30% for taxes, and the remaining 20% can be reinvested into your business or kept as profits. Using this method will ensure that you always have cash for the necessary expenses in your business and can invest in your growth.
Not Separating Business from Personal
Don’t mix business with pleasure – this applies not just to life, but to your bank accounts as well! A major mistake first-generation entrepreneurs make is running their businesses out of their personal bank accounts.
If you are doing this, drop everything and head to the bank to open a business account right now.
While it may seem easier and less of a hassle (especially if you’re at a stage where you are the only person working in your business), not separating business transactions from your personal transactions is a huge mistake. It is a red flag for the IRS when filing your taxes and can land you in the middle of an audit. Even worse, you may have all of your business expenses rejected if the IRS cannot distinguish between personal and business transactions.
Solution: Set up a business bank account and keep transactions separate
Setting up a business bank account is fairly simple and only takes a few minutes. Once you have that set up, be sure to only use this account for business transactions. You can also link your business bank account to your accounting software to save yourself the trouble of reconciling your books.
This will make things easier at tax time and you don’t have to worry about defending every single expense in your business to the IRS.
Avoid Financial Mistakes with the Right Support
Entrepreneurship can feel like a minefield sometimes. With so many different things to keep in mind, we inevitably make mistakes, especially as first-generation business owners. What can make this entrepreneurship journey easier is having the right support.
In the House of CEO Membership, that’s exactly what you will get. Learn about the fundamentals necessary to build a thriving business, and the pitfalls to avoid. Set up your financial foundation and open your mind to the possibilities. All with the guidance from someone who has supported hundreds of other business owners through this journey. Learn more and sign up for the House of CEO Membership here.