How to avoid going broke soon after starting a business

Since 2018, Ahmed Mohidin, founder and principal adviser at Sigma Consulting and Training in St. Cloud, Minnesota, has helped business owners at the formation stage. If they don't understand profitability, expenses, operation costs and record-keeping as they start the business, it can lead to problems later on, he said.

"Unaccounted expenses and mismanagement is the biggest problem I see," said Mohidin, who offers free consulting to owners through Elevate Hennepin, a program designed to help small-business owners living in Hennepin County, Minnesota. "The more organized they are, the more successful."

It's very likely that a new business will not be profitable for at least a few months, Mohidin said. Building up reserves of at least six months to cover expenses, including living expenses, is ideal, he and other entrepreneurs said.

"Have some money to prepare yourself for not having a paycheck," he said.

The first thing business founders should do is open a bank account separate from their personal ones, Mohidin said. If not set up properly, it will be hard to determine which transactions were solely for the business during an auditing process.

Overdraft fees and bank charges can also affect business cash flow, he said.

Business owners should aim to allocate between 30% and 50% of their profits to personal compensation, Mohidin said.

"However, this allocation can be influenced by various factors, such as the size of the business, the industry it operates in and the financial needs of the individual owner," he said.

It's not a must to look at compensation as a percentage, said Alex West Steinman, co-founder and chief executive of the Coven, a company that operates multiple co-working offices in the Twin Cities.

"I would look at market rate for the role that you're filling as a founder and then determine what the business — and you — can sustain," she said, adding they should determine how much sweat equity they can put into the business before paying themselves.

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