Opening a small business has become the in-thing to do nowadays. Everyone you know seems to be quitting their corporate job to start their own flower shop or their own accounting firm.
That’s all well and good. But if you make mistakes with finances, you could soon become part of the 50% of businesses that fail before they reach five years. Only 1 in 3 businesses make it past the ten-year mark.
This is terrible because a lot of people start a small business to be freed from the cycle of work-eat-sleep-repeat. Not only that, but 82% of small businesses fail due to cash flow problems!
You probably started your small business because you wanted some respite from the rat race and financial freedom of sorts. If you are interested in learning what are the top seven mistakes that small businesses make with their finances, keep on reading!
1. Taking on Too Much Debt: Especially Credit Card
One of the problems with starting a new business is that expenses add up. Fast. Before you know it, you have a long list of purchases you need to make, that you didn’t account for in your budget (if you even have a budget).
As most people are used to putting everything they can’t afford onto their credit cards, small business owners tend to do the same when they are faced with cash flow difficulties in their business.
On average, each household tends to have $8,398 in credit card debt, according to debt.org. This is before any business expenses.
Put it on the credit card and worry about it later. That’s how you might end up thinking. But this path is laid with many traps, as you might imagine, especially one of ruining your high credit score.
You might be optimistic and say that you are going to make X amount of dollars this month from sales. But what if that doesn’t happen? What if you aren’t able to pay off your credit card bill this month? Or the next?
Before you know it, your debt will snowball into something you nor your business can afford. Avoid this pitfall by avoiding high-interest purchases on credit cards.
2. Making Too Many Unnecessary Purchases
Your first few years in business shouldn’t be a free-for-all, buy everything and anything your business might need. Even though your heart might be telling you to do that, you need to rein it in and spend as little as possible.
Not only do you want to avoid getting into debt, but you also want to avoid buying a lot of items on zero down payment, zero interest for a few months. You don’t need that shiny new business car or that beautiful new oak desk for your office.
You definitely don’t need shiny new equipment for your restaurant or bar. Or anything else like that. The best thing to do in the first few years of business is to buy only a few things. As much as possible.
But if you have to buy something, buy it used. It would be cheaper and easier on your frail budget.
3. Not Getting Business Insurance
Insurance. Everyone shirks at the thought of purchasing it. It seems so useless at times, doesn’t it?
But if you want to ensure that you don’t go bankrupt if your business does, then you need to buy business insurance.
Not only that but if someone falls on your business property or gets hurt by one of your employees, then you want to ensure that you have something in place to protect you and your business finances.
4. Not Creating a Budget
No one likes the idea of creating a budget. We get it. But one of the mistakes with finances is not creating one. Especially in a small business that’s fragile enough as it is.
Any little wind of adversity could topple your business over. Thus, it’s a great idea to keep some sort of a budget in place, for the items you buy and the salary that you pay yourself and others. Do this when creating business plans.
5. Not Planning for Tax Payments
If you have been a corporate employee all your life, your tax situation was pretty easy. You are used to the appropriate taxes being siphoned off your paystub every month automatically.
Business taxes are different and you need to account for the huge tax bill that might await you at the end of your fiscal year. Make sure you have the money for it in your budget.
6. Mixing Business and Personal Accounts
It’s annoying to pay for some things using one account and for others using another. It’s much easier to mix it all and worry about it when tax time comes.
But it will be much easier for you to know exactly how much cash you have available for your business if you keep your accounts separate. The more you mix the two, the more confusing it gets.
You don’t want to get to the end of the year and realize that in fact, you were in the red all year for your business, and you had been supplementing the deficit using your savings. God forbid!
7. Not Having Any Savings or Emergency Fund at All
Do not make this mistake. You know that having six months of savings in a separate account as an emergency fund is recommended to everyone.
But this becomes even more important for business owners, most of whom are sitting at the edge of their financial precipice all their business lives. You don’t want to end up with a UCC Lien on your business and lose your personal assets.
Don’t make this mistake. Have some sort of savings for those rainy months where your business doesn’t make that much money.
Mistakes With Finances Shouldn’t Break the Bank
Let’s face it. You are not going to be perfect from the get-go. You are going to make some mistakes with finances because that’s how humans are. Imperfect, and forever learning.
If you can follow the seven rules above, you will be far above the crowd of small business owners. In fact, you might even stay afloat past your tenth year. Here’s hoping for that!
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