Do you struggle to manage your business money successfully? Help is here. Here are 13 money mistakes every business owner should avoid.
With these tips, you should be able to manage your business finances effectively.
Now, when it comes to our personal lives, we are often guilty of making mistakes with money that can get us into trouble later.
Likewise, when it comes to starting a business, there is also a risk of making such costly startup mistakes with your finances.
For instance, how often have we charged something on our credit card that we wanted but couldn’t really afford?
We then ended up with huge credit card debt since we couldn’t pay down the full amount of what we had bought.
However, making money mistakes with your business will have more serious consequences.
At best, you will suffer lost profits.
At worst, you may end up having to close your business altogether.
Fortunately, you can learn from the mistakes of others.
Here are 13 money mistakes every business owner should avoid.
#1: Not Separating Your Personal And Business Finances
This is one of the essential business mistakes to avoid.
When you have a business, you have to develop the mindset that it is an entity/ a body that is separate from you, personally.
Any money earned by the business should go to the business first, not to you.
So, one of the first things you need to do is to open a separate bank account for the business.
All the income it earns should be deposited into this account, and business expenses should be paid from it.
The same goes for credit card accounts – you should have a separate card for your business and one for yourself.
Never charge business expenses on your personal card.
If you need to put money into your business in order to meet expenses, you have to deposit it into your business account first.
You also have to clearly state whether this money is considered a loan to the business or an investment.
This is number one on our list of 13 money mistakes every business owner should avoid.
Why Do You Need To Do This?
-It will make it easier to determine the financial health of your business. You will be able to see what its cash flow is and see if your business is profitable or not.
It is harder to determine your business profitability if you mix what you are personally earning and what your business is making.
-It will make it easier for you to claim valid deductions for business expenses. In order for these costs to be accepted, there must be supporting documentation.
If you don’t have supporting documentation and you have been personally paying your business expenses, it will be harder to approve the deduction.
–You will typically need to have business financial records separate from your own if you want to apply for a business loan or secure credit.
#2: Not Making A Business Budget
This is one of the most frequent mistakes on our list of 13 money mistakes every business owner should avoid.
This happens frequently because business owners often don’t understand the importance of a budget.
A business budget will allow you to estimate what your future income will be as well as your future expenses.
It enables you to control your business finances so you have enough money to cover expenses.
This way, you can grow your business.
It also allows you to see which expenses are not as essential so that you can control them.
The basic process for creating a business budget is as follows:
- List all your expected income on a monthly basis. If you are just starting out, you may have to estimate these.
- List all your fixed expenses. These include your rent, utility bills, and payroll.
- List all your variable expenses. These are expenses whose amount may change depending on certain conditions, as well as non-recurrent expenses.
- Tip: be conservative. In other words, make your income estimates on the low side and your expense estimates on the high side.
#3: Not Choosing A Legal Structure For Your Business
Most business owners see this point as being unimportant.
Their reasoning is that the business, after all, is just a startup, not a corporation.
However, establishing your business legally has many benefits.
First, it makes your business official, so that you will have an easier time approaching lenders if you need a loan.
Second, it will be easier to expand your business once you are ready to do so.
Although there is a number of legal structures to choose from, the most recommended one is the limited liability company or LLC.
The exact type of organization may vary from country to country.
But the one constant of LLCs is that the liability of the incorporators/owners is limited only to what they put into the business.
So, creditors cannot go after your personal assets such as your house or car.
The requirements for forming an LLC also vary among different countries.
Generally, however, you will need to file Articles of Organization with the relevant government agency.
The various owners of the LLC may also need to draft an operating agreement that details how they will run the company.
#4: Not Managing Your Cash Flow
Cash flow refers to the money that is going into and out of your business.
In order for your business to keep operating, you need to have a positive cash flow, meaning that more money should come in than go out.
Having a positive cash flow is not the same as being profitable.
You are considered profitable when revenues exceed expenses.
Profits can be recorded using accrual accounting methods or a cash basis method.
Accrual accounting means that revenues and expenses are recorded when they occur.
For instance, when you make a sale, this is recorded as revenue even if you haven’t been paid yet.
Cash Basis means revenue is recognized when the money is actually received and expenses are recognized when money is actually paid out for the expense.
On the other hand, cash flow refers to money that is actually coming in and being paid out.
So, your business can be profitable according to your books but still not have enough money to pay your bills.
For instance, you might have supplied goods to a customer and made a profit on the transaction.
However, the customer might delay paying you which means even though you have made a profit on paper, you have not received the cash from the customer.
This will affect your cash flow.
Here are some of the things you must do to manage your cash flow:
- Monitor your accounts receivable and payable. Keep track of when invoices are due and when you have to pay bills.
- Pay only when you have to. To ensure that you have adequate cash on hand, pay only on the exact date a bill is due.
- Make sure your customer understands what the payment terms are. These should be clearly printed on the invoice. You can also make it easier to get paid by providing customers with a payment method they are comfortable with as well as incentives for early payment.
- Keep your costs low. Particularly when you are starting out, you should ensure that your business uses its available resources efficiently and avoids waste. For instance, instead of buying new equipment, you can invest in maintaining your existing ones.
- Beware of hidden expenses. These are costs that you fail to account for, such as credit card fees, payroll taxes, travel expenses, and other operational expenses. You should make sure that you are aware of these expenses and take steps to control them.
- Establish a system for following up with late paying clients. You can also send a reminder email to the client a week before the invoice is due.
#5: Not Paying Yourself
You went into business to be your own boss and make money.
Not paying yourself means that you are effectively providing your business with your time and effort for free.
In addition, you may likely have no other source of income.
So how will you meet your personal expenses if you don’t pay yourself a salary?
Another of our 13 money mistakes every business owner should avoid that is related to the above is underpaying.
Paying yourself too little is just as bad as not paying yourself since it means that you are undervaluing the worth of your services.
How do you determine how much to pay yourself?
One method is to imagine that you are hiring someone else to do your job.
How much would you pay them?
You should also consider prioritizing your salary over your expenses.
In other words, pay yourself first before you cover your business’ bills.
This will ensure that you work hard to make the business profitable.
In addition, as a reward for your hard work, you should pay yourself a little more.
#6: Not Having Enough Working Capital
When you are just starting your business, you will likely not have enough cash coming in to meet your recurring expenses.
So you should begin raising capital before you begin operations.
Ideally, you should have enough working capital to meet at least six months of recurring expenses.
How can you raise working capital?
Aside from providing your own personal funds, you can also ask for loans from family and friends.
If you qualify, you can apply for a business loan from government agencies that help small businesses or from lenders.
You can also try to get a business line of credit, which allows you to draw money only when you need it.
However, you should not take on too much debt.
Although business credit is important, debt carries with it the highest amount of risk.
Indeed, the success or failure of your business is not tied to the amount of money you can raise. You should focus instead on ensuring that you build value in your business.
For instance, you should ensure that your product is the best that it can be.
You should also make sure that your business serves your clients well and treats your employees honorably.
#7: Having Too Much Inventory
Being too optimistic is also one of the common startup mistakes that new business owners fall into.
Of course, you would want to have extra inventory on hand to meet sudden demand.
But you must be realistic about the number of sales you would actually have.
If you have too much inventory, you are tying up resources that can block or delay your cash flow.
You will also have to bear the expense of storing and maintaining the excess inventory until it can be sold.
#8: Spending Too Much Upfront
Another consequence of being too optimistic when you start your business is that you spend too much on items such as expensive office space, company cars, advertising, and so on.
Of course, it is important that you present yourself and your business in the best possible light.
You don’t want your customers thinking that you’re not a professional operation.
But you have to balance this consideration with the costs you’ll be bearing later on.
Is it worth it? Will these costs help you generate revenue that will offset them?
#9: Not Asking For Professional Help When You Need It
Although there is a range of free and low-cost tools available to help you do your business accounting, at some point, you will need to consult with a Certified Accountant.
For instance, if you are not familiar with tax laws, you may not get all the tax deductions you are entitled to.
You may also underpay your business taxes, which could result in serious penalties later on.
There are so many mistakes you can make when it comes to taxation that can cost you and your business dearly.
If you have to pay for the services of a CPA or tax attorney, you should not hesitate to do so.
The professional fees you pay them now can save you more money in the future.
#10: Not Hiring The Right People
Once your business is in a position to start hiring people, one of the essential business mistakes to avoid is not investing in the right ones.
You should take your time and choose the right person for the job.
In addition, you should realize that talented people do not come cheap.
So you have to invest in talent since these are the individuals who will help your business grow to the next level.
#11: Not Having Enough Insurance
Being under-insured is one of the most serious financial mistakes entrepreneurs should avoid.
Insurance is one of those expenses that we all resent having to shoulder – until something unforeseen happens and we actually have to make a claim.
Not having insurance means that you will have to bear expenses such as property damage and liability claims out of pocket.
These costs can run into the tens of thousands.
Here are some of the types of insurance your small business may need:
- Health insurance. You should get coverage for yourself as well as any employees you have. High medical costs are one of the major reasons many small businesses eventually fail.
- Auto insurance. You may need this if you or your employees drive a lot as part of your business.
- Liability insurance. This policy typically covers some of the costs of claims made against your business for property damage or bodily injury.
You may also want to consult with insurance brokers to purchase packaged policies.
These are specifically designed to meet the needs of small businesses and provide a range of coverage types that they might need.
However, when you purchase insurance, you should always make sure that there is enough to cover liability claims.
If the amount of coverage is not enough, you will have to shoulder the rest of the claim out of your own pocket.
#12: Not Having A Contingency Fund
There are times when your business will encounter unforeseen emergencies.
When these happen, you should have some cash on hand to take care of them.
Although you can charge some of these to your credit card, these will only result in more costs down the line.
How much should you put aside?
One rule of thumb you can follow is to average your expenses for a month.
Then save at least three months’ worth of expenses in your contingency account.
#13: Not Taking Care Of Yourself
Of course, entrepreneurs want to pour their heart and soul into their business.
But ask yourself, what’s the point of starting a successful business, if you have not saved anything for your own future?
No matter what happens with your business, you should always continue saving and putting aside money for your retirement.
It might help if you cultivate the mindset that your business is an asset second and a source of cash flow first.
There are so many financial mistakes entrepreneurs should avoid, and we hope we have covered the most common of them here.
But what is important to remember is that businesses rarely fail because they commit one big mistake.
Rather, it is as a result of many small mistakes over time.
Therefore, you should pay attention to details such as your cash flow, your business budget, and your expenses since these are likely where the success or failure of your business will lie.
And, of course, you should not neglect yourself and your needs in favor of your business.
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