Financial Mistakes Small Businesses Make
Managing a small business is no easy task. There are plenty of things that can go wrong, from bad marketing, incorrectly pricing your products, targeting the wrong niche, or worst of all, running out of money. No matter how you slice it, small businesses are a goldmine for mistakes, but that doesn’t mean they can’t be avoided.
These are the top 3 common financial mistakes small businesses make:
Combining Personal and Business Accounts
Mixing finances might not seem like that big a deal at first, especially when you’re putting up most of the funding. This is a major mistake that small business owners make, and it’s dangerous for two reasons:
1) You will end up bankrupting yourself AND your business if your business relies only on you to stay afloat. It’s a slippery slope taking from your personal accounts and funneling it into your business account.
2) Taxes will be incredibly difficult, if not impossible, to figure out what’s deductible and what was a profit or loss for the year. This could trigger an audit by the IRS if they believe you write off personal goods and services as business expenses.
There should be a clear distinction between your personal accounts and the business’s accounts. Without it, your personal finances and assets will take major hits if your business goes under.
Poor Budgeting and Bookkeeping
Keeping on top of revenue, expenses, and cash flow may seem overwhelming and complicated, but it’s absolutely necessary to running a successful small business. Creating a comprehensive budget should be one of the first things you do as a small business owner. A budget is something you should be able to refer back to and make decisions based on sales, revenue, expenditures, payments, taxes, and payroll.
Common budgetary mistakes small businesses make include:
Underestimating what you owe in taxes
Overspending up front
Ignoring cash flow
Cash flow projections are critical indicators of where your business stands financially, and yet many small businesses overlook them. Right off the bat, you should practice thorough bookkeeping and learn how to read an income statement and a balance sheet. These tell you how much money you have on hand, and how much you’ll bring in and pay out. Many times small businesses overestimate when they’ll start bringing in money, and underestimate their expenses, leaving them unsustainable and desperate for cash.
Asking for a line of credit or loan too late
Small businesses will inevitably encounter financial difficulties, but you don’t want to wait until you’re in dire straits before looking for a line of credit. Lenders won’t even look your way if you’re desperate and can’t prove you’re on solid ground to repay them. Contrary to popular belief, the best time to look for a line of credit is when your business is doing well and is stable enough to convince lenders you can repay what they’ve loaned you.
Traditional banks, online lenders, credit card advances, and specialty lenders are possible funding sources, however you should take the time to compare their rates and terms before agreeing to anything. Local banks might be more selective about lending to small businesses, so try and work with major lenders instead.
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