Most Common Banking Mistakes Startups Make
If the point of a business is to make money, then obviously you want to be very careful when it comes to managing that money. Your bank is key in this matter. Choosing a banking solution is one of the most important decisions you need to make as a startup (see my previous post on Banking Solutions for Your Startup for more details and advice on this subject). Your bank is more than just a place to store your money; it’s a tool to help you to minimize your financial risks and to manage your cash flow.
Your work isn’t done once you’ve selecting your banking solution; it’s only beginning. You need to closely manage your banking to maximize the advantages and to avoid putting your company at risk.
In my experience, I’ve seen so many startups making the same banking mistakes and creating serious issues for themselves. Here are some of the most common banking mistakes, and how to avoid them.
Co-mingling of personal and business accounts. So many startups are guilty of using their personal expenses for business usage and business expenses for personal. You simply cannot use one bank account for both personal and business. Open a separate business account and take pains to keep the costs separate; if necessary, you may transfer funds from your personal to business, and vice versa, as long as the accounts live separately.
Not doing a month-end bank reconciliation. Every month you should review your bank statements, as a way of monitoring your banking activities, to ensure that everything adds up. Doing so allows you to catch little mistakes (like a bank teller error) that, left undetected, can create larger financial issues as well as larger losses that you can easily prevent. Month-end reconciliation will also bring to the forefront any instances of fraud so it’s a good fraud protection control. Also reconciliation allows you to keep a close on company transactions and performance.
Lack of understanding of your cash forecast. If you haven’t projected out your cash flow, you could find yourself drowning in debt, unable to pay bills. To avoid being overleveraged (and at risk for bankruptcy), up until the point at which your company is cash-flow positive, you’ll want to plan your finances on a weekly basis. Once the cash starts flowing and you’ve built up some reserves, you can extend your planning periods from weekly to monthly.
For help with cash management and financial projections, contact Early Growth Financial Services.
Not choosing the right banking partner. If you’re a startup, you want to select a bank that has a strong focus and understanding of the needs of early-stage companies. Your bank will be your business partner, part of your invaluable ecosystem. Make sure you’re finding the right partner.
Using debit cards instead of credit cards. Using debit cards for business carries greater risks than using credit. There are fewer protections for your debit cards and any fraud on your debit card could be far more devastating than fraudulent activity on your credit card. The “unlimited access” aspect and liability limits of a debit card are problematic. In case of theft, your entire business account could be drained before you even know it, leading to bounced checks, negative relationships with vendors, and overwhelming liability. Debit cards are also harder to track than a credit card, particularly if more than one person has access to the debit card.
Lack of preparation for bank loans. If you are seeking a bank loan, you need to prepare your financial projections and statements accordingly. Banks want to see valid statements in order to deem your startup as worthy of a loan.
There are, of course, other banking issues that startups get themselves into trouble with including such seemingly small mistakes as postdating checks, up to larger issues of financial strategy such as pursuing yield at the expense of liquidity or capital preservation. But, over all, the list I’ve provided contains the top banking issues I’ve seen.
As with any business relationship, it’s your responsibility to proactively manage your affairs. Banking is no exception. Managing your accounts properly will give you greater insight into your finances, greater control over your startup, and greater financial protection.
Have startup banking questions? Let us know in comments below or contact Early Growth Financial Services for banking advice.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, a financial services firm providing a complete suite of financial and accounting services to companies at every stage of the development process. He’s a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.
- The 5-Step Guide to Calculating Your Startup Finances
- 5 Most Common Financial Mistakes Startups Make
- Tracking Your Startup Expenses