As a small business owner, you take on many different roles. One of the most important yet challenging roles is managing the business’s finances. Oftentimes small business owners do not have a background in finances and start the business focusing on bringing in customers rather than bookkeeping. Because of this, many companies (according to the Small Business Administration, 50% of small businesses) find themselves making money mistakes that put them in challenging financial situations that they cannot get out of, which in worst-case scenarios, leads to failure within the first five years.
By being aware of these common money mistakes that businesses make, you can improve your chance of success and profitability and avoid becoming another statistic.
8 Money Mistakes Businesses Make
Making Large and Unnecessary Purchases
Starting a business does require out-of-pocket expenses. You may be tempted to purchase the newest, most advanced technology or rent out the larger office space, which can add up very quickly. It’s wise to resist this temptation and put together a budget from the very beginning. Break down your expenses (technology, employees, software, etc.) and how much overhead you’re looking to spend.
Curb the urge to spend your business loan or savings on unnecessary purchases. Look at the more affordable options, such as hiring freelancers or using free website templates. The more money you save initially, the more wiggle room you will have down the line once the business is up and running.
Not Having Separate Bank Accounts
While it may be more convenient to keep all of your finances in one bank account, it can come back to bite you. And while it may not seem imperative when you are first starting, do yourself the favor of having separate savings, checking, and credit card accounts before you even make your first dime. Doing so will make accounting much more manageable–whether you’re doing it yourself or outsourcing with an accountant, allow you to plan for tax season, and budget.
This also gives you a bigger picture of your business’ health. You can separately track what you’re personally earning and spending, along with the revenue that the business is bringing in and costing every month. In terms of finances, this also helps protect your credit score should the business’ finances dip unexpectedly.
Lastly, and most importantly, having separate accounts changes how you view your business mentally. If you are serious about building a future for your company, you want to put the money you make into the business to help it grow rather than having every dollar go to you directly.
Incurring Credit Card Debt
This is a life lesson that everyone should live by. Credit card debt is a very slippery slope that can be difficult to navigate once in. While using credit cards is a standard business practice, don’t overspend in hopes of future revenue.
Because it is easy to simply swipe and pay later, people fail to remember that they are incurring interest charges whenever a credit card bill is not paid in full. Because of this, the debt only grows larger. If possible, use cash or a debit card when first starting.
Neglecting Business Insurance
Having business insurance is the best way to ensure that your company and assets will stay afloat should there be unforeseen events. Some states do require it, while others do not; however, it’s crucial to protect your company.
From general liability insurance to professional liability coverage to business income coverage to commercial property insurance, there is a wide variety of policies that one can have. It is up to you to research and select the insurance policies that are right for your business. Your safest bet will most likely be a Business Owner’s Policy (BOP), which combines general liability, property insurance, and business income coverage.
Not Having An Emergency Fund
Any financial expert or blog will tell you the importance of having emergency savings for unexpected expenses or hard times. Yet one of the biggest money mistakes people make is being unprepared. No matter how much we try to plan, there will always be instances that require expenses that you were not expecting. The rule of thumb for small business owners and entrepreneurs is having three months worth of expenses saved.
Not Preparing For Taxes
Taxes are one of the most challenging parts of being a business owner. When you’re on your own, you are solely responsible for the tax liability. Taxes vary depending on the state, type of business, the size of the business, and more. And while it may be easy to track in the beginning, as your business grows, it’s easy to get caught up in everyday operations rather than record-keeping.
Whether Self-employed or a corporation, you will want to make estimated quarterly payments to the IRS, so you are not stuck with a hefty bill once April rolls around. Accurately calculating these payments requires some time and effort, so if possible, hire a professional. If not, allot time every week to work on your books.
Related Article: What Is The Difference Between A Bookkeeper And An Accountant?
Not Setting A Budget
As mentioned earlier, having a budget is crucial for starting. But it’s also essential for the future of your company. When you budget, you can accurately manage your spending. Without
at least a rough budget on what you can and cannot afford to spend in a month, you may find it difficult to succeed.
To create a budget, follow these steps:
Write down all of your expected income for a month
List your fixed expenses (bills, rent, payroll, etc.)
List your fluctuating expenses
From there, crunch the numbers. Being conservative with your estimates and budget gives you buffer room should the numbers differ from what you expect.
Whether your business is a product or service, pricing can be tricky when in the beginning stages. Charge too little, and you won’t make much profit, charge too much, and you’ll lose sales to competitors. When starting, businesses typically charge too little as a means of getting started.
When setting up your pricing formula, take into consideration your costs for labor, advertising, supplies, and other expenses. Then add a profit margin. You may also want to take a look at competitors to price accordingly.
Once your business is up and running, if you have priced yourself too low, you may have a hard time raising your prices in fear that existing customers will go elsewhere. If you have an established number that makes you feel comfortable, continue to reassess annually.
Related Article: Revenue Vs. Profit: What Makes Them Different?
Making financial mistakes, in the beginning, is inevitable. You may learn some hard lessons as a small business owner, but you can prevent financial hardships down the line if you avoid these eight money mistakes.