Top 5 financial mistakes small businesses make and how to avoid them
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Running a business means you’ll go through ups and downs. You’ll face good times and bad times, whether it comes to supplier upping their prices, inflation, staff leaving, emergency expenses and so on. And while some of these are out of your control, many other things can be easily sorted.
Your finances are among the things you have control over. However, some people feel overwhelmed with their money, mainly because they’re exposed to learning the hard way. These being said, here are a few mistakes small business owners make and how to avoid them.
Failing to prioritize the cash flow
The cash flow must be a priority, so you’ll have to monitor it accordingly. If you’re worried about paying wages or suppliers, chances are you’re failing to control the cash flow. Most businesses face this issue at time. It’s stressful, but it can also frustrate staff or even prevent the growth of your company.
Managing money isn’t easy, indeed, but it shouldn’t be too much of a challenge either. First, you’ll need to assess cash flow and figure out what’s causing all the stress and problems. Customers paying too late, poor inventory management or poor spending habits based on credit cards are the main reasons.
Once you assess the situation, it’s time to find viable solutions by managing everything. Upfront payments, deeper inventory controls and perhaps a few digital solutions can help up. Clear your credit debt and encourage staff to talk about cash flow issues.
While most of these issues are within your control, the truth is some of them may require professional support. Ideally, you shouldn’t get there, so try to sort everything out before things go out of control.
Losing control over costs
This is a no-brainer, yet a lot of business owners fail to pay attention to these things. Negligence is deadly and before you realize it, your software will be outdated, your bookkeeping costs will skyrocket and your bills and POS prices will jump through the roof.
In the long run, any potential financial move, growth or expansion will be limited by this issue. Besides, you won’t have a decent understanding of all numbers to make such changes.
Other than that, many business owners fall into this trap when their profits are good. Life seems good, but this trend won’t last forever, of course. They spend too much and they don’t hesitate to waste. Their negotiations are poor as well, knowing that they’re safe anyway.
Finally, it’s imperative to budget properly. You need to cover your budget over each week or month, but also yearly. You’ll need to plan for expenditures before they become a problem. Besides, you’ll be able to spot trends and solutions this way.
Failing to understand taxation
Just because you have a bookkeeper, it doesn’t mean you don’t need to know anything about taxation. Sure, you get a bookkeeper because you’re not an expert. And a professional can actually save you money and time if you think about it.
But at the same time, you still have to understand what’s going on. Based on where your business is established, there might be different sets of laws, regulations and taxation rules.
For instance, business owners need to be aware of several key differences between federal and state taxation – says George Dimov owner at DimovAudit.com. Federal taxes go to the federal government. State income taxes are collected where the business is registered or operates.
Not planning for taxes
Just because you pay your taxes, it doesn’t mean you’re doing it right. The secret here is to plan for them. Unfortunately, most people just pay when they have to, but they don’t really make a plan in terms of taxation. Taxes aren’t bills.
Prolific business owners have tax plans or strategies to optimize the burden. They know when to time their expenses in order to save on the tax. They save early, they understand the concept of tax credits and so on.
If you’re not sure about it, a tax professional will help out with the best practices, especially in terms of tax breaks.
Such strategies aren’t for taxes only, but for anything that involves the cash flow of your business. There are small bits you may not be aware of, hence the necessity of professional help at times.
Income over ROI
Photo by Lukas
Finally, many new business owners prioritize the actual money over the return on investment (ROI). Growing profits is the primary goal here and they often do it by eliminating things labeled as expensive. What’s really important here is prioritizing the ROI.
For instance, if you cancel a marketing contract costing $1,000 a month, it might look expensive, so you’re basically saving $12,000 a year. But if that marketing contract brings in $50,000 in sales every year, even a higher marketing contract would be a good deal because the ROI is amazing.
In other words, before cutting expenses or trying to increase profits, find out whether or not they’re actually worth it.
In the end, running a small business isn’t a walk in the park and financial slip-ups can happen if you’re not careful. But by planning ahead and staying on top of things, you can tackle these hurdles successfully. Just remember, being prepared and thinking ahead are crucial for keeping your business on track and thriving in the long run.
