To err is human. The problem is, most small businesses can’t afford to make financial mistakes.
Fortunately, most of these errors are easy to prevent.
In this article, we are going to talk about the most common financial mistakes that small business owners make in the hopes that the added awareness may lead you to make smarter financial decisions and your success. Paying attention to your business finances can also prevent you from falling into a debt cycle.
1) Diving in Without a Plan
You have probably heard it more than than a hundred times already. Don’t start a business without a plan.
It doesn’t have to be detailed, especially if you’re not intending to show it to anyone else. However, you should at least do your research, formulate realistic financial projections, and set a budget for your first year.
Doing so will give you a reference on what your financial priorities are and prevent bankruptcy during the early stages of your business.
2) Not Separating Your Business and Personal Finances
Here’s another classic piece of advice that, for some reason, most new entrepreneurs still tend to forget. Never combine your business and personal finances.
Always keep them in separate bank accounts.
Keeping all your finances in one place will lead to business cash flow issues and make tax computation and expense tracking unnecessarily difficult.
3) Failing to Stay Frugal
Every entrepreneur just wants the best for their business. That’s why it can be tempting to invest in the latest technology, the most stylish office space, and the most talented employees.
While it’s true that they can give your startup a boost of advantage against competitors, they would also require you to spend money that frankly, you have yet to earn.
Formulating a realistic budget, sticking to it, and staying frugal are the best ways to keep your business afloat. Put your capital only on things that are absolutely essential.
Do you really need that equipment or piece of furniture? Then you might want to look into alternative ways of getting them. Maybe someone in the family is not using one and you can borrow it instead? You can also consider renting or getting secondhand.
At the very least, avoid making big purchases without a plan. Keep in mind that there’s always a better time for everything. For instance, you can mark the next big sale on your calendar and put a little bit of money away before your purchase.
Check out these amazing tips for saving money in your business.
4) Not Setting up an Emergency Fund
But what about unexpected expenses? That’s what an emergency fund is for. It’s a form of savings intended to prevent debt during a crisis.
We recommend setting up two to cover your business and personal affairs respectively. This will also prevent you from using your business funds for personal emergencies and vice versa.
Here’s a question we frequently get from our readers: how do you know if something is an emergency? That’s simple. Ask yourself, can you go about your daily life amidst this issue? If yes, then it’s not an emergency. If not, then it is.
Your car broke down in the middle of nowhere, the only computer you have suddenly won’t power on, your child got into an accident and needs to get rushed to the hospital一these are only a few examples of cases that warrant the use of your emergency fund.
Here’s another question: how much should you save? The more savings you have, the better. However, we do recommend having enough to keep your business (or your personal life) comfortably running for three months even without income coming in.
5) Neglecting Business Insurance
Think of running a small business as driving a car. Your emergency fund serves as a seat belt. It’s your primary protection against accidents. It might not be enough to save you from a total wreck, though. You’ll need an airbag for that. That is your business insurance. It further minimizes the financial risks in case of unforeseen events.
Not all policies are the same, so be sure to do your research to determine the one that best fits your needs.
There are three basic types of small business insurance that we recommend new owners look into:
- General Liability Coverage. This type of policy seeks to cover non-employee bodily injury and property damage. For instance, suppose a customer tripped and fell while shopping in your establishment. Being enrolled in this type of policy means that you won’t have to shoulder his medical bills out of pocket.
- Commercial Property Coverage. Here’s another type of policy that new owners should really consider. Commercial property coverage seeks to protect your physical location and other assets. This includes your inventory, the tools and equipment you use for production, or even the pieces of furniture in your office. Depending on your chosen coverage, this type of policy can also help you recover from damage and loss brought about by natural calamities or fire.
- Workers’ Compensation Insurance. Finally, you should also consider getting workers’ compensation insurance. It is a type of policy that seeks to provide benefits to your workers in case of work-related injury or illness. For instance, suppose an employee got his hand caught in a piece of equipment. This policy will provide for his medical care, lost wages, and even disability benefits.
6) Underestimating the Necessity of Financial Tools
There’s no rule against using a journal to keep track of your business finances. In fact, this practice has its own merits.
However, we still think that using it as your only method is a potentially deadly mistake.
Manual methods are inconvenient and more prone to inaccuracies. They will also lack organizational and analytical features that will provide you with the data you need to make informed financial decisions.
You must start using a good accounting software.
7) Ignoring Your Business Credit Score
Your business credit score is a public record that shows your startup’s financial history and reliability.
It is an essential grade that you will need later on as you further scale your business.
Not only will you need it to secure business financing but can also grant you better terms, attract potential investors, and improve brand recognition.
8) Putting off Investment in Research and Marketing
We understand why they might not be on your priority list during the first few months of your business, but this mistake can significantly impact your growth.
Consumer and product research, for instance, can reveal available opportunities that you might have missed otherwise.
On the other hand, taking too long to invest in marketing can slow down sales and ROI.
9) Not Asking for Help When Needed
Finally, don’t be afraid to seek the help of financial professionals. Having an accountant is always ideal. Meanwhile, a financial expert can give you sound advice that can increase your chances of achieving business success.
It can also help to consider customer feedback and constructive criticism coming from concerned friends and family as long as you believe them beneficial for your business.
As we have mentioned, to err is human. Making mistakes and learning from them is part of running a business. That said, isn’t it still better to avoid them whenever you can?
Keeping these top financial mistakes in mind will not only help minimize risks but will also set up your business for success.