6 Financial Pitfalls Small Businesses Should Avoid

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Running a small business successfully is no easy feat. As a small business owner, you have to look after every aspect of your business, from hiring employees to marketing to managing finances. For starting a business, a brilliant idea and passion are, no doubt, the significant factors that determine its success; but these are not enough. Another crucial thing for a business’s success is managing finances properly.

According to the U.S. Bureau of Labor Statistics, 20% of small businesses shut down within the first year, while almost 45% fail in the first five years. While there are different reasons behind this shutting down, the biggest problem is financial issues.

When it comes to finances, you need to tread very carefully. Most business owners make financial mistakes that lead to losing profits at best or closing down the business at worst.

If you are a small business owner and you want to avoid financial pitfalls, here are six things to consider.

  • Not Hiring Financial Professionals:

To avoid financial pitfalls, one must be able to detect them early on. Thus, to manage your business’s finances, you need a finance expert. Many business owners ignore this factor and take the responsibility of managing finances themselves. But being the owner does not mean you can, or you should, do everything.

Since you obviously cannot be an expert in everything, it is better to hire a finance professional for your business. It is imperative to hire the right person, though. Look thoroughly at the qualifications of the candidate you want to hire. A candidate with extra credentials, aside from a degree in finance, like different certifications, is ideal. If a candidate has certifications from a reputable platform, such as Wiley Efficient Learning, they will serve as the perfect financial expert for you.

  • Insufficient Cash Flow:

Whether you are about to start your business venture or have been in business for years, cash flow is the ultimate determinant of your business’s success. Some cash is enough to start a business, but consistent cash flow is necessary to keep the business running. If you don’t have sufficient cash reserves to maintain a good cash flow, it will cause many hindrances for you.

Cash flow refers to the cash going out of and coming into the business. So if the cash outflow is more than the inflow, you have some financial troubles right around the corner. You need to boost cash flow by better managing your accounts’ receivable balances, limiting the number of customers you offer credit to, managing your inventory, etc.

Run a weekly cash flow statement to assess your purchases, sales, the money you owe, and the money owed to you so you will have a clear picture of where your business is standing in terms of cash flow.

  • Combining Business and Personal Finances:

Most small business owners fail to separate their personal and business finances, which leads to several financial complications. It causes several monetary complications, like measuring profit, balancing accounts, filing taxes, or even setting clear financial goals for your business.

It’s reported that more than one-quarter of small businesses have no segregated accounts for business purposes, and 23% of the businesses revealed that mixing business and personal finances is a major issue they

face.

To deal with all business-related activities, ensure to open up a separate business account. This way, you will have a separate business credit card, and you will be able to easily trace your business-related cash flow. Your business-related items will be accessible and organized in one place.

Moreover, when it comes to auditing, whether there is a government auditor involved or an internal audit team, combined personal and business expenses are a big red flag.

  • Unnecessary Big Purchases:

You want your dream office to have all the latest equipment, furniture, and technology, but be objective and ask yourself if you can afford this all. Sure, these are the utmost necessary things, but how about some less expensive alternatives?

Make a budget and stick to it. Don’t overspend on things you do not even need, especially in the beginning, when your business is just taking off and you have limited resources. These luxuries are the ones you get when you earn enough profit to buy them. Rent a few things, or ask friends or family who might not be using something, like furniture, for example, or get some second-hand things.

  • Unforeseen Expenses:

Life is full of uncertainties, and any unpredictable expenditure can shake the ground of your business. You need to have an emergency fund for the rainy days. The pandemic was a great reminder of how crucial it is to save for any unexpected events. As already discussed, the importance of cash flow and unexpected expenses can hinder this flow.

Save from your earnings whatever you can in the beginning and gradually increase your saving ratio. Here again, keep in mind to have separate savings accounts for your business and personal life. Experts recommend saving up to three months’ worth of expenses or six months’ worth if you earn more.

Saving will not only help your business in case of a financial emergency, but it can also help you reach your goals. When you need money for, say, a new product launch, and you have enough money in savings, you can use it instead of borrowing or taking loans and getting into cycles of debt.

  • Tax Compliance:

A private business has a lot of different taxes to pay and regulations to comply with. In a small business, whether it is a partnership, sole proprietorship, or small corporation, you need to pay tax on your profits. This is no surprise; everybody knows that. But the mistake most small business owners make is not tracking expenses properly, which can make them eligible for reductions in taxes.

It’s reported that 85% of small businesses overpay their taxes, while some fail to comply and underpay their taxes. Both situations harm the company’s finances as these require a lot of time, effort, energy, and money to work through.

Always ensure your business complies with the rules and regulations, and seek professional assistance if necessary. Studies show that more than taxes, not complying with the rules costs businesses more money. Also, always pay taxes on time to avoid paying a late fee or fines.

Conclusion:

Some mistakes are unavoidable when you run a small business, but carelessness in handling finances can make or break a business. Large businesses have enough backup to cover some financial mistakes, but the chances are few when it comes to small businesses. How you handle your business’s finances paves the path to success. Here are six mistakes you must avoid to keep your business afloat.

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