What are the most common financial mistakes small business owners make, and how can you avoid these traps to keep your doors open for years to come?
Administering the finances of a small business is generally the most difficult duty a small business owner takes on. There are several reasons for this, but smaller businesses lack a background in business finance and, at least at first, are more focused on bringing in business and customer service than on record keeping and financial planning for their company. As a result, many people work long and hard hours at their enterprises with just subpar results to show for it. Others completely fail.
Here are the 5 Most Critical Financial Mistakes Small Business Owners Make:
Failing to Create a Budget
A budget is a plan that allows you to look at your income and expenses over a specific time period (month, quarter, or year) to manage your finances — and your spending — accordingly. If you don’t have a budget, or if you don’t stick to it, you may overlook future tax requirements, insurance payments, or other unexpected (but pricey) bills. Perhaps you’ll tie up cash by making a significant purchase during a period when sales are typically weak in your company. In any instance, if you end up needing a loan or incurring credit card debt, you’ll be adding interest expenses to your business expenditures.
Making Large and Unnecessary Purchases
When starting a business, you may be tempted to spend a lot of money on the newest technology, a nice office space, or hiring only the most qualified workers. Refrain from using your business loan or financial assistance to buy personal or unneeded business purchases. Instead, limit your spending to items that are necessary for the operation of your firm. Be as frugal as possible in both your business and personal life until your company has grown sufficiently to allow for such expenditure while still having money to save.
Mixing Business and Personal Banking Accounts
As soon as your company is up and running, you’ll need to create a bank account particularly for it. You should also apply for a company credit card to assist you to keep track of your business costs.
It is critical, however, that you never utilize your accounts or funds for business activities, and vice versa. Failure to segregate company and personal costs may result in cash flow problems and financial complexities with balancing accounts, estimating earnings, filing taxes, and defining clear financial goals.
Not Planning for Tax Liability
When you go out on your own and begin collecting full payments from clients/customers, you are fully accountable for the tax liability. Accounting might still feel straightforward if you’re establishing a web-based small business, especially if you have a client invoicing system in place. However, when your company expands, it’s easy to become engrossed in day-to-day operations, ignoring tax obligations until April.
Paying quarterly taxes on your income is the simplest method to remain on top of your tax burden. You should also become acquainted with the state and industry-specific taxes that may affect your small business.
Smaller businesses don’t even consider emergency savings, especially if their company has yet to turn a profit. But that is precisely why it should be factored into your budget from the outset.
Don’t be intimidated by the idea of opening a savings account. Keep it simple and consider it a normal monthly cost for your company. In this manner, you may gradually build up a reserve that will help your company stay afloat. Most experts agree that six months of operational expenditures is a good starting point for an emergency fund.