According to one survey, starting a small business remains alive and even accounts for 66% of the American Dream. However, not everyone who wants to start their own business actually does. This is because of two financial reasons: one, they are concerned about financial security, and two, the financial commitment that comes with it.
It’s undeniable that money management is one of the biggest struggles for many small business owners. Failing to have a strong grasp of your finances cannot only slow down your business growth. It can also eradicate it. Still, even if you’ve hired a temporary chief financial officer or accountant for the job, it’s best to oversee your finances to reduce the risks of mistakes better. Read on to find out what these financial mistakes are.
Not planning for tax obligations
The taxes you see deducted on your full-time job paycheck is quite simple compared to when you own a small business. Being a small business owner requires you to be fully responsible for your tax obligations. You can start planning for tax liability with your accountant and set up the accounting processes.
A good rule of thumb is to understand the industry and state-specific taxes that can affect your small company. This can help you easily create estimated quarterly payments and avoid encountering a huge tax bill at the end of tax season. Moreover, perform periodical checks and organization sweeps on your taxes to minimize oversights or errors.
Not building a financial cushion
Financial experts agree that having an emergency fund or savings account can help keep a business afloat during those rainy days. Keep in mind that no matter how prepared or careful you are with your finances, you can still come across expenses that you don’t expect. It is advisable to have a contingency fund of at least three or six months of your business expenses.
Do not pressure yourself to start a rainy day fund for your business. It is advisable to start small and include it in your monthly business expense. This allows you to build a reserve for the downpour that could hurt your vendor payments or inventory.
Immediately making large purchases
Many small business owners are tempted to hire the most experienced candidates, get the best office space, and buy the latest technology. Each of these cost a lot of money. It’s a good habit to avoid utilizing your financial resources or business loans for any unnecessary purchases. Plan which expenses are the most vital to opening and running your company.
And while investments are crucial for growing a business. Do not get them too soon. Spending your fragile first years in the business focusing on building your reputation and getting more customers. Only consider scaling when you can and if deemed necessary. To have better discipline in managing your finances, create a clear budget that includes what your business can and cannot afford in a month.
Mixing personal and business accounts
One of five business owners does not have separate bank accounts for their personal and business finances or expenses. Mixing these two types of accounts is a big deal. It can make it challenging for both you and your accountant to monitor your finances, from deductible expenses to household expenses. Separating your personal and business bank accounts will help you set boundaries on spending which money and help you better track your company’s financial health.
In opening a separate business bank account, make sure to choose the one that offers great benefits but with low fees. Other things to consider include introductory offers, transaction fees, monthly minimum fees, discount rates, as well as interest rates for lines of credit, savings, and checking.
Incurring credit card debt
Lastly, incurring too much credit card debt is never a smart move, obviously. Responsible utilization of business credit cards should be practiced. While these cards are very much convenient to use, keep in mind that they also come with interest fees, which can be heavy if you don’t pay them off on time. In other words, you are somewhat compounding your expenses. Prevent using credit cards as much as possible. Instead, use your debit cards whenever you can. The only best time to use your business credit card is during emergencies.
While some financial mistakes are minor, they can still be a harmful problem that can potentially bring your new business down to its knees. Work together with your financial officer or account and set up a solid financial plan for your small business. Avoid these mistakes by paying more attention to your business finances and plan for better future revenue!