The number of new small business owners is steadily increasing. Avoiding financial mistakes is among the most difficult duty a small business owner takes on. There are numerous reasons for this, but most of them lack a background in business finance and, at least at first, are more focused on generating and serving customers than keeping an eye on the books. As a result, many people work long and hard hours at their companies with only subpar results to show for it.
According to the Small Business Administration, half of all small businesses fail within five years, and one-third of them fail within the first two years.
Now, why don’t most small businesses survive beyond five years? Because many of them make common, fundamental mistakes, many of which are financial.
To avoid bankruptcy, entrepreneurs must avoid these eight typical yet costly financial mistakes in their business
1. Failure to make or stick to a budget
A budget is a tool that allows you to look at your income and expenses over a specific time period (month, quarter, or year) in order to manage your finances — and your spending — accordingly.
If you don’t have a budget, or if you don’t stick to it, you may overlook future tax requirements, insurance payments, or other unexpected (but pricey) bills. Perhaps you’ll tie up cash by making a significant purchase during a period when sales are typically weak in your company. In either instance, if you end up needing a loan or incurring credit card debt, you’ll be adding interest charge to your business costs.
2. Purchasing large and unnecessary items
When starting a business, you may be tempted to spend a lot of money on the latest technology, a nice office space, or hiring only the most qualified workers. Refrain from using your business loan or financial backing to buy personal or unneeded business purchases. Instead, limit your spending to items that are really necessary for the operation of your firm.
Be as frugal as possible in both your business and personal life until your company has grown sufficiently to allow for such expenditure while still having money to save.
3. Waiting Too Long to Apply for Credit
When you need a company loan or line of credit the most, it’s the worst moment to look for one. Finding capital will be tough or impossible if your company is paying its invoices late and on the verge of failing. When your business appears to be stable enough to convince a lender that you will be able to return what you borrow, it is time to seek finance.
The type of credit you seek will be determined by the nature of your business, the purpose of the cash, and the quantity of the loan. Traditional banks, online lenders, credit card cash advances or purchases, and specialty lenders are all options depending on your needs.
Interest rates and terms vary greatly, so give yourself plenty of time to discover the best funding source for your needs. Don’t be disheartened if local banks turn you down. Check with the big online lenders to determine whether they will deal with you and how their interest rates and terms compare to other possibilities.
4. Not Paying Attention to Cash Flow
Even if your company is lucrative, you can easily get into financial trouble if you don’t manage your cash flow.
Monitor your cash flow, track spending, and analyze sales, accounts receivable, and other deficits to remain on top of things.
5. Ignoring business insurance
It is critical that your organization is adequately insured and protected. Having the proper company insurance removes financial risk from unforeseen catastrophes. Unfortunately, many small business owners make the error of canceling their coverage before obtaining a new policy, or of not selecting the insurance that best suits their company’s needs.
6. Lack of an emergency fund
Most financial experts believe that having an emergency fund or savings to fall back on for unexpected needs is one piece of advice that can keep your business afloat during difficult times.
Regardless of how well you prepare, there will come a time when you will incur expenses that you did not anticipate. Entrepreneurs should set aside at least three months’ worth of expenses as a reserve money for both business and personal purposes.
7. Failure to plan for tax obligations
You will have varied state and federal tax requirements as a business depending on the size of your business, where you are located, what type of business you operate, and so on.
You are responsible for paying your complete tax responsibilities throughout the year if you are self-employed. To prevent a hefty tax bill at the end of the fiscal year, it’s a good idea to make projected quarterly payments to the IRS.
Paying attention to how much you owe in taxes and taking actions to lawfully minimize what you owe will help you save a substantial amount of money and keep your business afloat for a longer period of time.
8. Relying on a single primary source of revenue
It is best to presume that it is contracting unless you are actively growing revenue. You should consider your revenue as a portfolio; you do not want all or the bulk of your revenue to come from one or a few sources.
When you initially start out, you are frequently so preoccupied with serving your first few clients that it is impossible to establish other accounts or business. However, over time, you should develop other revenue streams so that when big revenue streams dwindle (as they usually do), you may continue to increase your entire business.
Achieve Business Success by Avoiding Major Financial Mistakes
When it comes to making financial decisions, whether you’re new to business or have been in operation for years, there are several potential for errors. You can increase your chances of success — and profitability — by being aware of and avoiding the typical business financial mistakes discussed above.
The guidance of a financial expert is still one of the best ways to grow your business. Schedule a free consultation today with the Certified Public Accountants of Today CFO!