There’s nothing like running a business to bring up all your “money stuff.”
In the process of avoiding dealing with our own money stories, strengthening our relationships to the almighty dollar, and–goodness forbid–looking at spreadsheets, we make some pretty damaging mistakes when it comes to money.
In the New Economy, it’s never been more important to get the money stuff right. After all, we’re counting on you to become one of the economic powerhouses shaping our future!
Here are 5 of the money mistakes I see entrepreneurs making in this new age of commerce:
Mistake #1: Confusing Income, Revenue, and Profit
Probably the biggest mistake I see freelancers and small business owners making is confusing their personal income with their business revenue and therefore not truly taking profit into account.
The main reason this is a big problem is that it makes planning damn well impossible!
If you plan to earn $80,000 in revenue, but you need $75,000 to live on, there’s a really good chance you won’t come up with that $75,000. What’s more, you won’t have any money to invest back into the business.
So let’s clear these things up:
Income is your personal paycheck. It’s the money in the business you send back to yourself in exchange for the work you do. The sooner you start thinking of your income as an expense of the business and not just what’s leftover (or worse, the same as what you’re bringing in), the better.
Revenue is the sum total of what your business generates in earnings. It’s the total amount of money you have to play with. Revenue is not your personal income.
Profit is both the money you have to invest into the business on something unproven or new (i.e. not in the original expense budget) and the money you can pay yourself as the owner of the business. Profit is not your personal income–even though some of it comes back to you.
By keeping track of each of these 3 figures separately, you have a much better idea of what is really going on with both your business and your personal finances.
Speaking of separation…
Mistake #2: Commingling personal and business finances
You should know by now that your business and personal finances should be in separate accounts. Even if you don’t have a business bank account and a business credit card, business money should be in its own places.
But a lot of people start down the path of commingling their personal and business finances because they don’t realize they’re “starting a business” when they’re just starting out. By the time they realize they have a business and things should be separate, it seems impossible to divide them.
I know because I was in this situation only a few years ago. I had kept good records as my business grew… but the massive task of separating accounts had me paralyzed.
What’s worse: having commingled my accounts meant that I had the wrong outlook on my money. Not only were my finances not separate, the way I thought about my money wasn’t separate.
Even though I knew the difference between income, revenue, and profit and could distinguish between those things on paper, in my brain, every dollar I was spending on the business was also “mine.”
This, it shouldn’t need to be said, is not how you grow a business or run a company.
Separating business from personal finances creates an immediate money mindset shift and opens your eyes to new opportunities.
Mistake #3: Setting goals based on previous income
There are a number of reasons setting goals based on your previous income at a job just doesn’t work.
The first is that being self-employed dramatically changes your financial situation–especially if you live in the USA. You might need to buy healthcare on the open market instead of through your employer’s plan (yes, world, welcome to America). You’ll almost definitely be paying self-employment tax instead of payroll tax (and, oh yes, you’re responsible for all of it).
On the positive side, you might not need to pay as much for your work wardrobe, gas, or lunches. But… you might realize that you need someone to do the laundry or mow the grass because it’s just harder to find the time to do chores when the option is grow your business or take care of the house.
I would set a revenue goal of at least double your previous salary (if you were happy with it) so that you build a business with the capacity to actually take care of you. You can adjust your personal income from there.
But the biggest reason to not use a previous salary as the baseline for your revenue goals is that by defining your business by “earning enough,” you set yourself up for failure. Fall even a bit short and you need to pinch pennies or suffer through unnecessary anxiety.
Worse, you’ll end up creating a business with limited capacity–just enough to give you 50 hours of work per week and a meager paycheck. Goody.
Mistake #4: Using Your J-O-B Money Mindset to Manage Your Business
Almost every entrepreneur was an employee first. You likely learned all sorts of things in that job that have benefited you in your business.
But there’s one thing you learned that isn’t helping: how to manage your paycheck.
The J-O-B Money Mindset is the internalized practice of managing a finite sum of money in a zero sum game.
In other words, over time, your brain figures out exactly what it takes to stretch that paycheck across as many needs and desires as it can until it runs out. Then you get a new paycheck and the process starts again. It might not be “living paycheck to paycheck” but the zero sum mindset still exists.
But that’s not how your business works. There is no finite amount on that check nor is it a zero sum game. You can make as much money as you decide to make and you always know how to generate more.
While that might sound pie-in-the-sky, if you don’t believe it, it’s probably because you’re still living with a J-O-B Money Mindset.
This mindset prevents you from doing things like hiring, investing in better software, taking risks, and looking for unique opportunities. The J-O-B Money Mindset is about protecting what you have, the Business Money Mindset is about expanding on what you have.
Mistake #5: Not Negotiating
I’ll keep this one brief: always ask.
Ask for more, ask for less. Just ask.
If you’re negotiating with someone who’s paying you, negotiate for more. Start with your best-case-scenario number. You’ll be surprised how many times you get it.
If you’re negotiating with someone you’re paying, always negotiate down. You might be surprised with how often this works! You may know that your cable company or credit card company will lower your rates, you might not know that many of your business service providers (think apps and technology) will do this too.
Don’t take a “failed” negotiation as a failure. Sometimes the price is the price or the pay is the pay. But if you don’t ask, you’ll never know.
Getting Right With Money Is Crucial To Breaking Through
Now look, if you’re making one or more of these money mistakes, it can feel overwhelming when you think about fixing them.
Don’t try to tackle everything at once. But do tackle it.
It’s tempting to think you can make wait to correct these until you’re making more money. Unfortunately, these mistakes are a big part of the reason you’re not making more money.
If you want to break through to a new level of earning, you must fix these money mistakes first.
To help you do just that, we’ve put together a virtual conference all about making and managing money in the New Economy.
The best part? It’s just one of the perks of joining CoCommercial.
Members get in on this conference absolutely free. And so can you when you take us up on a 30-day free trial.
See you there!