Top financial mistakes small business owners should avoid
Running a small business comes with many financial challenges. It can be difficult to manage cash flow, project growth, and make strategic spending decisions when you’re focused on daily operations. While some financial missteps are inevitable, avoiding these common mistakes can help set your business up for long-term success.
Not separating personal and business finances
One of the biggest mistakes small business owners make is mingling personal and business finances. While it may seem easier to use your personal credit card or bank account for business purposes, this habit can make it very hard to track where the money is actually going. Taking the time to establish separate business accounts and credit cards keeps things clear and makes tax time much simpler.
Poor cash flow management
Cash flow management is crucial for any small business. However, many owners don’t pay close enough attention to incoming and outgoing cash until it’s too late. Get in the habit of reviewing cash flow weekly or monthly to spot potential shortfalls ahead of time. Build an emergency fund with at least 3-6 months of operating expenses as a buffer. Make cash flow projections for future quarters and years as your business grows. With tighter cash flow controls in place, you’ll be able to cover expenses without relying on short-term loans.
Not investing in financial management tools
While Excel spreadsheets served you well initially, trying to scale a growing business without more robust financial tools gets challenging fast. Don’t wait until you’re drowning in receipts and spreadsheets to invest in small business finance software. The right tools provide a clearer picture of where money is coming and going. They automate mundane tasks like invoicing and tracking payments. Look for an affordable, cloud-based solution that integrates seamlessly with your accounts. The time savings and financial insights are well worth the investment.
Delaying difficult financial decisions
When money gets tight, it’s tempting to avoid difficult decisions like letting staff go or limiting spending. However, delaying the inevitable often makes the situation worse. Tackle problems head on by cutting discretionary expenses, freezing hiring, renegotiating terms with vendors, or securing funds from investors or lenders. While no business owner wants to reduce staff, sometimes cutting labor costs in the short term makes it possible to avoid closing altogether. Resist the urge to hide from bad financial news – face reality and adapt quickly.
Not planning for taxes
Many new business owners get caught off guard when that first tax bill arrives. Self-employment taxes, payroll taxes, and income taxes add up fast. Work with an accountant or financial advisor to estimate your tax liability. Set aside at least 20-30% of each income payment for taxes, or more if you anticipate significant business growth. Accurately tracking income and expenses also minimizes your tax burden. Don’t leave tax planning until the last minute. With a tax strategy in place, you can avoid penalties and make smarter financial decisions.
Failing to involve a financial expert
Entrepreneurs often try to manage all aspects of their business alone, not realizing when they need financial help. A financial advisor, accountant, or experienced bookkeeper can be invaluable in starting and growing a small business. You can get help analyzing your company’s financial data by hiring a virtual financial analyst. The right professional asks smart questions, digs into details, and provides guidance on major decisions like financing, forecasting, pricing, and tax strategies. Don’t let pride or cost stop you from involving a financial expert. Having experienced eyes on your business provides assurance and catches issues before they become major.
Avoiding these common financial missteps takes discipline and dedication. But putting in place the right financial processes and practices early on gives your small business the best chance at prospering.