When it comes to making sure your small business grows, the best tool is “show me the money”! After all, your success lies within your budget. Ensuring a healthy bottom-line is crucial if you want your new venture to expand. Sadly, many small business owners commit common mistakes in their financial management that are truly avoidable. Remember, small margins of error also accumulate in time, so you cannot afford to be complacent. Be vigilant in nipping missteps in the bud. To make sure you are ready to handle these potential pitfalls, educate yourself. By knowing these six common small business mistakes, you can avoid a major catastrophe. Let’s get started to ensure you see your business flourishing and thriving!
1. Failing to Keep Cash Reserves on Hand
This is a major small business pitfall that many commit. Having no cash reserves is a huge burden to bear. It is a costly business mistake that can cause the sudden demise of your operations. For example, if your key customers are late in giving their payments, how will you cover the rent and wages? In case of an emergency, you may be forced to take high-interest cash loans that will only set you back even more. As such, you must have sufficient cash reserves on hand. Make a rough estimate and ensure its availability for any eventuality. Do note that most startups can experience a negative cash flow at the early stages of operation. Thus, it is even more vital for newbies to have cash reserves available.
2. Forgetting to Conduct Cash Flow Forecasting
It is vital for any business to always conduct regular cash flow forecasting. After all, this has a direct correlation when it comes to building your cash reserves. If you have no idea what your future cash flow needs are, you will get in trouble. As such, you must have a clear picture of how much cash you need to keep smooth operations, pay for debts, the amount to keep in reserves, and the like. You need to make a solid cash flow budget with your accountant. This is a vital tool to ensure proper business management and solid financial health.
3. Being Unmindful of Small Debts
As a small business owner, you must have discipline when it comes to borrowing any amount of money. This includes debts like purchases made with your credit card or even something small like leasing tools. It would be best if you always had a safety margin to work with, which means you feel confident to pay all your debts. Never exceed this margin, or you will find yourself drowning in debt. Remember, it is easy to rack up high-interest credit card debt but very hard to pay. If you overextend your budget, you will struggle to catch up. The worst-case scenario is business dissolution and bankruptcy.
4. Struggling to Keep Expenses Under Wraps
Even if you have cash on hand, you must always stick to your budget. You must not spend on a whim because business is cyclical. Some months you are up and making huge sales, while other months are sadly leaner. For this reason, it is vital to control your spending by determining which are needs and wants. Learn to forgo unnecessary expenses, especially if it stacks up even more debt and results in negative cash flow.
5. Mixing Personal and Business Accounts
If you find yourself mixing up your personal and business accounts, you set yourself up for complete failure. Just don’t commingle these accounts, even if you have a sole-proprietorship. Every business structure must be treated as a distinct and separate entity. You can do so by being strict in separating your personal and business finances. This includes savings accounts, checking accounts, and any other billing expense. If you pay for your business expenses personally, make sure you keep a reimbursement form on file so you can see where the money goes. In the same token, business income must go into its corresponding account, so there will be no confusion and minimal errors. Though it may seem tedious, it is worth it because you save yourself from future problems.
6. Disregarding Professional Help
Finally, most small business owners prefer to DIY, thinking that it will save them money. Whether it’s bookkeeping or filing taxes, seeking professional advice can help you avoid issues. At the same time, hiring a pro leaves you more time to focus on other matters.