In this blog post, we’ll outline seven common mistakes small businesses make when it comes to money and provide tips on how to avoid them.
Small businesses are the backbone of the country’s economy, employing more than half of all private sector workers. And while there are many things that set small businesses apart from their larger counterparts, money management is one area in which they often struggle.
Making large and unnecessary purchases
One common mistake made by small businesses is making large, unnecessary purchases. The common misconception that having more of the ‘right’ thing will grow your company quickly can lead to costly spending that drags on resources.
This type of investment should be considered strategically and carefully to ensure it’s necessary- particularly if you’re operating on a limited budget. Before making any decisions, ask yourself if the purchase is truly essential for growth and profitability or something that provides only marginal value for your business.
Ignoring business insurance
This is probably the most neglected and termed “unnecessary.” Every day, small business owners make common mistakes regarding their insurance needs. Ignoring business insurance is one of the biggest missteps a business can make; without proper coverage in place, companies risk serious financial losses due to accidents, lawsuits and other unexpected events.
From property damage to professional liability, the right business insurance can help mitigate the costs involved in such opportunities—and provide a sense of security for everything associated with that particular entity. Ensure you’re up-to-date on your insurance policies; neglecting this important step could cost your business more than you’d anticipate.
Combining business and personal banking accounts
Many small business owners make the common mistake of combining their personal and business banking accounts. This often causes issues down the road when they need to break apart transactions. It can be difficult to determine whether each deposit or withdrawal was intended for personal use or for business purposes.
Whether your business is just starting out or you’ve been in operation for a while, it is important to pay attention to best practices and consider setting up separate bank accounts for your business and your personal funds.
This will ensure you have greater control over your cash flow that is consistent with tax regulations. Such separation of accounts will allow for more streamlined bookkeeping and better overall financial planning, making filing taxes easier as well.
Accumulating debt is a common mistake small businesses make. Poor financial planning, overspending and too quickly expanding operations are common reasons this debt has built up.
To prevent further accumulation of debt, start by tracking spending. This will help you become more aware of where your money is going. Create a budget and set a goal to pay off existing debts and adjust future spending habits so the same mistakes aren’t made again.
Additionally, be sure to stay on top of industry trends, manage cash flow regularly and keep an eye on what other successful businesses are doing to ensure you don’t fall behind.
Operating without an emergency fund
One of the common mistakes small businesses make is operating without an emergency fund. When unexpected expenses or emergencies arise, having a reserve fund can be the difference between maintaining financial stability and facing insolvency.
Without this crucial buffer, businesses often struggle to cover sudden costs. They may take extreme measures – such as taking out high-interest loans or cutting corners to reduce costs – in a desperate attempt to stay afloat. While it may be tempting for cash-strapped entrepreneurs to avoid setting up an emergency fund, it is important to consider all the short-term and long-term risks of not having one.
Putting aside a portion of monthly profits will help small business owners secure their future and provide peace of mind should financial emergencies arise.
No plan for tax obligations
A common mistake small businesses make is neglecting to plan for their tax obligations. Without any forethought, they may find themselves in a financial bind or worse, dealing with the costly penalties of non-compliance.
Small business owners should be proactive when it comes to taxes; not only should they keep detailed records throughout the year, but they also need to stay abreast of constantly changing regulations and understand their resulting tax obligations.
Being informed and planning ahead can save business owners time and money when filing taxes.
Operating without an updated budget
Operating without an updated budget is a common mistake for small businesses. Doing so can cause financial headaches, as businesses won’t have clear economic goals or know how much they have spent or earned.
Spending can become haphazard when money is not budgeted, making it harder to measure progress and revenue targets against expenses. Furthermore, without an updated budget, taxes become difficult because there won’t be a clear track of expenditures and income.
Rather than going into the year unprepared and shooting in the dark, creating a comprehensive budget that’s regularly reviewed and updated is essential for a successful business operation.
If you’re a small business owner, it’s crucial that you avoid making the common mistakes we’ve outlined in this post. Not only can they lead to financial instability, but they can also be costly and damage your reputation.