Managing your business finances is as important as getting new customers as well as serving the existing customers. However, if you are like most of the small business owners, managing your business cash and other financial bookkeeping is probably not your strong suit. You can stay on top of the game if you avoid making these common small business financial mistakes.
Of many small business responsibilities that a small business owner can take on, the most difficult one is managing the business’ financials. There are many reasons for this; however most small business owners do not have an experience in business financials, and at the start, they are more focused on serving customers and bringing in business as compared to bookkeeping and making financial plans for their small business. Consequently, many small business owners work long and hard with only average success to show for their efforts. However, some business owners fail completely.
You can improve your odds for your business’ success and your overall business’ profitability by being aware of and avoiding these unusual small business financial mistakes.
- Not Having Enough Cash Reserves
Inadequate cash is one of the primary reasons of business failure. Most of the time, startups miscalculate how quickly they will start making money and misjudge all the expenses that they will incur. However startups are not the only businesses prone to failure due to inadequate cash.
You can run into financial problems in many ways once you have a regular flow of business. Among these problems, one is failure to understand the difference between the sales and cash flow. You can have lots of sales on record, however unless you get paid in advance for those sales, you’ll have expenses to pay before you collect from your customers. If some of your big customers pays late, or even doesn’t pay at all, you may not have the cash to timely pay your bills.
Most of the growing businesses can possibly have the same difficulty. You grow your business in order to serve your bigger customers and cover large orders, and before you start earning from your growth, you need money to pay your employees, taxes, and other growing overhead costs.
Another problem for an existing business is that the cash flow may also make the small business owner overlook falling profits and mounting debt. In order to avoid the cash flow issues, you need to estimate all your expenses and allow for the time it can take you to get paid.
- Plastic Dependent
There are some small business owners that are forced to turn to credit cards for early stage survival, particularly when they have not planned properly. Credit cards deliver high interest rates and annual charges. Whether through a loan, a capital infusion or your personal funding, making sure that adequate working capital can save you from credit card debt.
- Mixing Personal and Business Finances
Whether you’re looking to start a new business, or you’re currently running an established one, mixing your personal and business finances can lead you to adversity. For example, you are running a small business and you are the sole owner and you buy business supplies by using your personal credit card or use a business check to pay for your personal purchase, you will find it quite difficult to keep track of the expenses and revenue your business actually is making during the year.
You will also experience some problems at tax time when trying to separate out your personal and business purchases to determine what is deductible on your business tax form, and what your profits or losses are. The things will go worse if you get audited and the IRS believes you have purchased the services or products for your personal use and deducted them from business expenses.
Eventually, if you do not separate your business and personal expenses, you’ll find it quite difficult or in some cases impossible to get a small business loan if you need one.
If your business is part-time with little profits, you have to have a separate checking account as well as a separate credit card for your small business. You may need to take out the credit card to your name while you are setting out.
- Shorting Yourself on Compensation
In the startup phase of your business, it could seem to be a robust decision to reorganize any and all your profits back into your business. But not compensating yourself along the way could damage your personal finances as well as your financial standing.
- No Organized AR System
If you don’t have an organized AR system in place, design your invoice paper with the payment terms on the back and follow a clear process in collecting payments. Additionally, make sending quick reminders part of your business.