The most common financial mistakes graduate entrepreneurs make

Amongst the world’s ambitious graduates are some of the next generation’s entrepreneurs and innovators. Some will have a carefully defined business plan. Others will have little more than a dream and bundles of enthusiasm.

Starting out in business straight after Uni isn’t easy. For the bright-eyed grad, a lack of life experience and industry expertise, along with a mountain of student debt can make the business journey a particularly tricky one. A recent report by CNBC warns that with graduate debt at around $30,000 for many students, starting a business is a huge challenge. It really is no wonder graduate entrepreneurship is declining.

As well as student debt, there is also the issue of financial know-how. Let’s take a look at some of the most common financial blunders graduate entrepreneurs make.

1. Not having a business plan

Accounting firm, OS Accounting, say “One of the mistakes a lot of entrepreneurs make when launching a start-up, including graduates, is to forge ahead with an idea without proper planning. Starting a business without a business plan is risky. It’s the fundamental starting point for testing whether or not a business idea is feasible.”

A business plan sets out the financial and operational objectives. With a well-developed business plan, entrepreneurs are also much more likely to attract angel investors or secure funding from venture capitalists.

2. Overestimating revenue

Brimming with optimism, entrepreneurs are renowned for overestimating revenue. In fact, for many eager graduates launching a start-up, revenue expectations are unrealistic. David Cummings, an Atlanta-based tech entrepreneur who has founded 10 companies, understands all too well the pitfalls of overestimating revenue.

Most entrepreneurs overestimate revenue growth, especially in the first few years.

Here were Pardot revenues:
Year 1 – $2k
Year 2 – $400k
Year 3 – $1.2M
Year 4 – $3.2M
Year 5 – $7.4M

When it works, early years are brutal and later years are magical. Keep grinding and build on.

— David Cummings (@davidcummings) 5 July 2018

Most entrepreneurs overestimate revenue growth, especially in the first few years.

Here were Pardot revenues:
Year 1 – $2k
Year 2 – $400k
Year 3 – $1.2M
Year 4 – $3.2M
Year 5 – $7.4M

When it works, early years are brutal and later years are magical. Keep grinding and build on.

— David Cummings (@davidcummings) July 5, 2018

3. Overspending on set up

A whopping 29 per cent of start-ups fail because they run out of cash. Early-stage entrepreneurs face specific challenges as they often lack business skills. Many entrepreneurs overspend on office space and tech tools.
With remote working becoming the norm, the virtual office, where possible, can save a lot during set up. Taking time to properly research tech tools can also save money. Various pieces of tech often overlap – as they are charged per user, spend can easily go up if this isn’t given attention.

4. Misunderstanding the difference between profit and cashflow

Things can look good on paper, but if a business runs out of cash it is in trouble. Poor cashflow planning and running out of cash is, according to Forbes, in the top 10 reasons why entrepreneurs fail.

Not all entrepreneurs have savvy accounting skills when they set out in business. Some basic accounting knowledge can prove invaluable. Most businesses record revenue and expenditure when it is incurred (rather than when invoices are paid). This means it is possible for a business to be profitable on paper, but not have any cash in the bank.
Business coach, Stever Robbins says the difference between profit and cashflow is often the difference between success and bankruptcy. Being able to read the accounts and understand the cash position in a business is vital.

5. Mixing personal and business accounts

Running a business through a personal bank account is never a good idea. Business banking should be kept separate and the importance of this is all too often ignored by eager graduates who want to avoid the expense of a business bank account.

Mixing personal and business bank accounts can also turn out to be a nightmare when it comes to tax reporting. It makes it easier to miss expenses and could be an issue if the business is investigated by the Inland Revenue.
In an article for Inc., Levi King, entrepreneur, CEO and Co-Founder of Nav, advises never to mix personal and business finances for the following reasons:

• Separating business and personal finances helps you look legit
• It helps to achieve a stronger business credit score
• It helps with tax reporting

6. Not budgeting or planning for tax

All businesses have tax obligations to the state and locally, and tax bills can hit fast and hard. Ignoring taxes is one of the top business budgeting mistakes. Seeking tax advice prior to starting a business is also something many entrepreneurs fail to do, but with the right tax strategy, tax liability could be considerably lower.

7. Not having an emergency fund

Cashflow is king when it comes to business. Many graduates finish their education in debt, not with an emergency fund they can fall back on during hard times. The U.S. Bureau of Labor Statistics reports that approximately one-third of all businesses fail within the first two years because of cashflow issues.

Summary

In spite of the pitfalls, there are many advantages of launching a start-up as a new graduate. New grads actually make great entrepreneurs. Many graduates are both innovative and more financially-savvy than they get credit for. The student mentality of surviving on a pittance can also bring business benefits.

There are lots of financial considerations for graduates, including how to repay student loans and finding a deposit for somewhere to live. That doesn’t mean graduates can’t start their own business. Here are 8 reasons why as a graduate you might want to give entrepreneurship a go. Remember, business planning is key!