4 Common Investment Mistakes With First-Time Profits

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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One of the most exciting moments in a young start-up is that first instant your business turn an honest-to-goodness, completely legitimate profit. You've paid all your bills, you've settled all your debts for the month, and lo and behold you still have money left over. Hallelujah!

This is a point when a lot of businesses, caught up in the sheer thrill of having extra cash for the first time ever, make mistakes that could cost them everything. Here are four of the most common, and what you can do to avoid them.

1. Alright, I Can Finally Pay Myself, Maybe a Lot!

It's tempting after scrimping and saving for so long to cut yourself a little bonus when you can finally afford it. But this is one of the worst things a business owner can do, especially with the spoils of a first-time profit. While you might be just dying to take that extra bowl of profit, suck it up, Oliver: the times of plenty can be deceivingly short.

You can invest initial profit in any number of constructive ways: have a website professionally built, pay down your small-business loan, save for a rainy day (there will be many.) But resist the urge to spend frivolously on yourself. Every dollar you put back into the business has a chance to come back to you, while money not funneled back has no chance to return. Do not cash out early, even with a teeny tiny bonus to celebrate finally seeing black. That’s what retirement is for, whippersnapper.

2. Buying Advertising without Doing the Research

One of the biggest bloopers I made when I first turned a profit as a small business owner was buying a lot of advertising without doing market research.

Advertising is, of course, quite essential for creating and maintaining brand awareness, but it's nothing that should be bought impulsively, especially with early profits. "But I could finally see my business’ name in the Big Print, woo-hoo" you think. But how much return are you getting on that 8 x 11 ad you placed in Regional Magazine None of Your Clientele Reads Monthly?

I’ve seen a lack of advertising destroy many promising small businesses. Brand awareness is important. But do your research first. Or better yet, hire someone who knows advertising to do it for you—though maybe temporarily.

3. Hiring an Employee You Can’t Afford Long-Term

Temporarily, I say, because promising someone a long-term job is not something to be taken lightly. One of the most heartbreaking things I went through as a business owner was laying someone off because I violated this rule. So I understand why it’s tempting. You’re busy. You want to hire help, but consider doing it on a seasonal or trial basis. Then see what the cash flow situation is like.

Taking on extra employees is great—you’ve become one of those fabled “job creators.” But hiring someone, promising someone a steady job, is a serious commitment. Don’t make promises until you can keep them, but also until an employee’s services are necessary—that is, the job has grown to something you absolutely can’t do yourself. Because extraneous employees are also a violation of rule number one.

4. Don’t Over-Expand, Captain Hubris

Growing small businesses often have that urge to expand, and expand fast!

Before expanding the scope of your business, ask yourself first: are there gaping holes in your model that need to be fixed? The answer is, if your business is young, almost definitely. While you want to grow, and you can’t grow without taking risks, your business foundation needs to be absolutely sound before you use it to prop up a new harebrained venture. Hubris kills business. Just because you can capitalize a new venture doesn’t mean it needs to happen now! Take every new chance to expand with the same seriousness with which you initiated your initial business venture, take a sober look at your financial capacity, and you’ll minimize your business’ risk of Death by Over-Expansion.

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