Many people underestimate how hard it is to become a successful business owner. The chances are that you aren’t alone in your industry. You’re going up against seasoned veterans that have years of experience helping them.
You can make things harder for yourself by mismanaging your finances. Reports show that 40% of small businesses don’t make a profit. You’ll fall into this category easily if you don’t learn how to manage your cash.
The problem is, it’s easy to make simple financial mistakes when running your business. Below are seven common financial mistakes to avoid when running your company.
1. Ignoring Your Business Credit Score
Debt has a bad reputation in the world. However, that doesn’t mean that it doesn’t have benefits. If you use it wisely, you can accomplish a lot that you couldn’t have otherwise.
You can use debt to fund inventory, expand your business, and grow your team. If you tried to bootstrap everything without debt, your business would end up growing at a much lower rate.
One big issue businesses face when applying for credit and business loans is their business credit score. People know that their credit score has an impact on these things on a personal level, but not everyone knows that their business has a credit score too.
Make sure you understand what your business credit score is and work to improve it. A better credit score will give you access to better deals on your debt.
2. Not Separating Personal and Business Finances
It’s easier than ever to start a business. All you need to do is fill out a form with your state government. Give your state their fee, and your business will be incorporated in no-time.
Unfortunately, many people stop at this step. They don’t take action to separate their business and personal accounts. They use their personal bank account to send and receive money for their business.
While you can get started this way, it will cause headaches long-term. You need a way to separate your business finances. If you don’t, you’ll have a tough time tracking your income and expenses during tax time.
Make sure you get an EIN from the IRS. You can use this number to open a business checking account.
3. No Tax Planning
Taxes are more complicated when you run a business. You don’t only have an income tax to worry about. You also have to deal with payroll, sales, and usage taxes. These added tax liabilities can cause problems if you don’t know about them.
Tax planning is something that you can’t put off until the end of the year. The government expects you to make payments throughout the year. You’ll need to pay them every quarter.
The problem is that these are estimated taxes. You’ll need to estimate how much business you do each quarter. You’ll be able to make more accurate estimates by planning ahead of time.
4. Skipping Business Insurance
There are a lot of risks when running a business. You never know when something unexpected will happen. It’s a problem when somebody else is negatively affected by the problem.
Business insurance will protect you in these cases. Your insurance will help cover damages when an accident harms somebody. If you skip out on it, you may have to pay for the damages out of pocket.
Your insurance can also protect the assets of your business. It can cover data loss, property damage, and theft. Your insurance will cover your costs up to a certain amount, so you can get back in business without replacing everything yourself.
5. Not Having a Reserve Fund
Things are great when you have cash coming in. Business owners use this time to scale what they’re doing so they can grow their business.
The problem is, these upward trends will eventually slow down or stop.
If you have your money tied up when this happens, you can find yourself in trouble when you need to pay your bills. You need to have money in reserve, so you don’t fall behind.
Try to set aside a portion of your profits in a savings account. You’ll slow down your expansion, but will be protected when you need cash to solve a business problem.
6. Too Many Small Purchases
It’s easy to measure the impact of large purchases in business. They don’t happen that often, so it’s easy to sit down and consider the pros and cons of your purchase.
It’s much easier to let little purchases get out of control. After all, a few dollars every once in a while couldn’t hurt, right?
You need to track every purchase your business makes, no matter how small it is. If you let small purchases skate by, they can end up making up a lot of your monthly budget.
7. Ignoring Cash Flow
It’s easy to get caught in the moment when running a business. When you see something working well, it makes sense to double down and do more of the same. The question is, will you see a positive return on your money for your actions?
Set aside time every week to examine how much money your projects are bringing in. You need to know when to call it quits on the parts of your business that aren’t profitable.
If you run out of money and can’t pay your debt, your business is going to be sent to collections. If you have any outstanding debt with federal agencies like the SBA, you might even get an administrative wage garnishment notice. You’ll start losing part of your paycheck until you pay back what you owe.
There Are More Financial Mistakes to Avoid in Business
It only takes one mistake to put your business in a dangerous situation. Make sure to learn about the other financial mistakes to avoid for your company. The more you know about potential problems, the better prepared you can be to fight against them.
Do you want to learn more about managing business finances? Keep reading our blog to discover everything else there is to know.