According to the Small Business Administration (SBA), over 20% of small businesses often fail within the first year of operation. A major contributing factor to business failure is poor financial management.
To avoid becoming a statistic, it’s essential for small business owners to understand common financial mistakes and how to avoid them.
In this article, we will outline the most common business finance management mistakes and provide tips on how to avoid them. We hope that this information will help you steer your business in the right direction financially and keep you from making costly errors.
Mixing Business and Personal Finances
Many small business owners often have the same bank account for their personal and business finances. This may seem like an efficient way to manage your money when you’re just starting. However, it can actually lead to a lot of problems down the road.
First of all, it can be challenging to track your business expenses when they are blended with your personal expenses. This can make it difficult to stay organized and can lead to you missing important deductions come tax time.
Additionally, if your business ever faces financial difficulties, your personal assets may be at risk if they are mixed with business assets.
To avoid this mistake, it is crucial to open a separate bank account for your business as soon as possible. Keeping your finances separate will help you maintain a clear picture of your business’s financial situation. It also makes it easier to track your spending and make sound financial decisions for your business.
Working Without a Finance Management Strategy
Does your business have a well-documented finance management strategy? If not, you could be making common finance management mistakes that can cost your business time and money.
A finance management strategy is a document that outlines your monthly business goals and how you plan to achieve them.
Your finance management strategy should include:
- A list of your monthly business goals
- Key performance indicators (KPIs) that you will use to track progress
- Documentation of your current financial situation, including income, expenses, and cash flow
- A budget for your monthly expenses
- A plan for how you will generate revenue
If you don’t have a financial management strategy, now is the time to create one. A finance management strategy will help you avoid common financial mistakes and keep your business on track.
Working without monthly goals means you have no way of measuring your progress or success. You may be able to get by without a financial management strategy for a while, but eventually, you will likely make many mistakes.
Not Recording Your Profitability
If you’re not tracking your profitability each month, you have no idea if your business is actually making money. This is one of the most common business finance management mistakes.
To avoid this mistake, set up a simple spreadsheet each month to track your revenue and expenses. Then, at the end of the month, calculate your profitability. This will give you a clear picture of whether or not your business is actually making money.
Recording your profits and expenses gives you a clear understanding of how much revenue your business brings in and where that money is going. Without this information, it’s difficult to make informed decisions about your business finances.
For example, let’s say you have a business credit card that you use for all of your business expenses.
If you’re not tracking your expenses, you may not realize that you’re spending more money than you’re making. As a result, you could end up with a lot of debt and no way to pay it off.
Poor Business Credit Management
Do you know how much your business owes and to whom? Do you know what percentage of your business loans you’ve already paid off? If you can’t answer these questions, your credit management techniques are poor.
You should be aware of all sources of spending within your business in order to keep track of where the money is going. This includes loans, lines of credit, and credit cards.
Poor business credit management can lead to several problems. It can make it difficult to get loans or lines of credit from banks or other financial institutions in the future. Additionally, it can put you at risk of defaulting on your loans, which can damage your business’s credit score.
There are a few simple steps you can take to avoid these problems. First, make sure you keep accurate records of all sources of spending within your business. This includes loans, lines of credit, and credit cards.
Second, make sure you make all loan and credit card payments on time. This will help you avoid defaulting on your loans, which can damage your business’s credit score.
Finally, if you’re having trouble managing your business’s finances, consider hiring a professional to help you out.
Inadequate Working Capital
Inadequate working capital occurs when a business does not have enough money to meet its short-term obligations, such as payroll or inventory. As a result, the company may be forced to take out loans or sell assets to raise cash.
Doing this will likely put the business in a difficult financial position and may lead to insolvency. There are several ways to avoid inadequate working capital. These include:
- Maintaining accurate records of all sources of spending
- Understanding your business credit management options
- Having a solid plan for using and repaying any loans you take out
By following these tips, you can ensure that your business has the working capital it needs to stay afloat.
Trying to Handle Everything Yourself
As a new business owner, it’s quite easy to try and handle everything yourself. From crafting the product to managing the finances, you want to be involved in every aspect of your business.
However, it’s advisable to delegate the financial responsibilities of your business to a professional. Unless you have a background in finance or accounting, chances are you’ll make some costly mistakes.
Additionally, handling everything can quickly lead to burnout, missed opportunities, and errors.
To avoid this, hire a professional accountant or bookkeeper to handle your business’s finances. This will free up your time and allow you to focus on other aspects of running your business.
When looking for a reputable accountant, ensure you check out this blog for the qualities of an accountant to work with.
Not Having a Plan
If you don’t have a plan for how you’re going to finance your business, you’re setting yourself up for failure.
You need to clearly understand your sources of spending, income, and business credit. This will allow you to make informed financial decisions for your business.
Additionally, you should create financial documentation for your business. This includes creating a budget, cash flow statement, and balance sheet. These documents will help you track the progress of your business and make necessary changes along the way.
If you’re not sure where to start, there are plenty of resources available online to help you get started. The Small Business Administration is a great place to start.
Purchasing Business Equipment You Don’t Need
Business equipment can rack up a lot of debt if you’re not careful. If you don’t need it, don’t buy it.
New business owners often go overboard when it comes to purchasing business equipment. They think they need the latest and greatest gadgets when in reality, they can get by with much less.
Before making any big purchases, sit down and ask yourself a few questions:
- Do I really need this?
- Can I wait a while to purchase this?
- Is there a cheaper alternative?
If you can answer yes to all three of those questions, then and only then should you make the purchase. If you’re having a challenge deciding what you need and what you don’t, seek out the advice of a financial advisor.
Purchasing business equipment is a big decision that can have lasting effects on your business finances. Be sure to weigh all your options before making a purchase.
Taking Unnecessary Loans
The business world is full of lenders willing to give you money. Whether it’s a business line of credit, a merchant cash advance, or equipment financing, there are all sorts of ways to get the cash you need to keep your business running.
But just because you can get a loan doesn’t mean you should. When you’re first starting out, it can be tempting to take out a loan for every little thing. However, this can quickly get you into debt and make it challenging to keep up with your payments. It’s essential to only take out loans when absolutely necessary.
Not Being Mindful of Interest Rates and Loan Terms
Interest rates and loan terms can affect your business in a number of ways. If you’re not careful, you can end up paying more than you need to in interest, or worse, defaulting on your loan entirely.
Make sure you understand the terms of any loans you take out and shop around for the best rates. Check with your local bank or credit union first, as they may offer more favorable terms than online and private lenders.
And don’t forget to factor in the fees associated with taking out a loan. Origination fees, for example, can add up quickly and eat into your profits.
The bottom line is that you should be mindful of the cost of borrowing before you take out a loan. This can save your business money in the long run.
Excessive Staffing
Excessive staffing means having too many employees on the payroll. This can be a result of hiring too many people during a busy period or not letting go of some employees when business slows down.
Having too many staff can lead to financial problems because wages are one of the biggest sources of spending for businesses. More staff means more work hours which can lead to overtime pay. You will also need additional office space and equipment to accommodate the extra staff.
Hiring too many employees can also lead to problems with morale and productivity.
If there are too many employees, it can be hard to keep everyone busy. This can lead to employees feeling bored or unproductive, which can lower morale. It can also be hard to manage so many people, which can lead to communication
To avoid excessive staffing, businesses should:
- Have a clear idea of their business cycle and staffing needs
- Use temporary or contract workers during busy periods
- Let go of employees during slow periods
- Review their staffing levels regularly
- Make sure they have enough work to keep employees busy
- Train managers on how to effectively manage a large team
By following these tips, businesses can avoid the financial and moral problems that come with excessive staffing.
Not Filing Your Taxes
One of the most common business finance mistakes is not filing your taxes. This can happen for a number of reasons, such as forgetting to file or not having the money to pay the taxes you owe.
Not filing your taxes can have serious consequences. You may be subject to late fees, interest charges, and even face criminal charges. In some cases, not filing your taxes can lead to the loss of your business.
To avoid this mistake, you should:
- File your taxes on time
- Keep track of your tax liability throughout the year
- Pay any taxes you owe on time
- Keep accurate records of your income and expenses
By following these tips, your business can avoid the penalties associated with not filing taxes. This helps you protect your business and maintain a good relationship with the government.
Avoid These Business Finance Management Mistakes
The world of business finance is full of pitfalls. But by avoiding the above common business finance management mistakes, you can set your business up for success.
Remember to be mindful of the cost of borrowing, staffing levels, and tax liabilities. This way, you can ensure that your business is on a path to financial stability. So take the time to do things right, and your business will thank you for it in the long run.
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