As a business owner, you are required to be many things in your business. But “Financial planner” often falls by the wayside, over taken by other more pressing matters like procurement, marketing and customer service. But ignoring this important aspect of your business can suddenly land you in a lot of trouble.
If you are just getting started in your small business, here are eight common financial mistakes made in small business you should avoid
Mistake 1: Lack of Cash Reserves
One of the biggest financial mistakes for small business owners to avoid is not planning larger cash reserves. There are a number of ways to fund a small business, and as you raise funds, you need to ensure that you have adequate cash reserves. You never know when a situation will come up and you’ll need to tap into your immediate cash–without time to apply for an emergency loan.
Also remember cash reserves in your personal life as well. While you should keep your personal and business finances separate, you also need to be prepared to take care of your personal needs while you’re waiting for your business to become successful.
Mistake 2: Ignoring the budget
Your budget is your financial road map. It will guide you on existing cash flow, upcoming expenses, incidentals and monthly or annual payments like insurance and tax. It will also give you a bird’s eye view of what your estimated cash flow will look like in any given month. Helping you understand if you can make that big growth purchase or if you should hold out for a stronger month.
Your budget should also take interest commitments into account as this can rack up quickly and put your finances under pressure. A rule of thumb is to stay on top of this information and create good book-keeping habits. Accounts can be a real bug bear for an entrepreneur but without accurate accounts and a budget to match, your business will very quickly get into trouble.
Mistake 3. Inadequate Insurance
Many business owners don’t like to think about insurance. However, it’s an important part of making sure your business is protected. Insurance mistakes like canceling a coverage before a new policy is in place, or not realizing what business policy is required in your business should be avoided.
You need to make sure you have the right insurance for your circumstances, from auto insurance and health insurance to various liability policies that you might need to protect your professional reputation.
Mistake 4: Mixing business and personal finances
Just because you have a small business doesn’t mean it can be merged with your personal finances. You need to ensure that you are creating early systems that will be able to grow with your business. If you keep you company and personal finances in the same accounts there is no way you can realistically keep track of what’s going in and out your account. By setting up separate accounts and credit cards you will also be in a better position to handle tax demands and foresee upcoming budgetary requirements. This is also an essential step if you want to get a loan or cash advance in the future as the lender will want to have a clear picture of your company’s finances.
Mistake 5: Under-pricing your product
A common question facing small business owners, is how to price your product. There is always the temptation that in order to attract new business, you should go lower in pricing. But this can be risky. Always ensure that you take into account the full cost of your product. It’s not only about the manufacturing and profit aspects, but also includes cost of labour, indirect cost and other overheads. Bear in mind that once you have set your pricing you should review frequently to make sure you are adjusting to inflation; supplier demands and market conditions. Setting your pricing is a delicate balance between being competitive and also making it worthwhile for your business.
So, don’t undervalue your service and if need be back your product with a solid marketing communication strategy that justifies your value proposition to your customer.
Mistake 6: Unorganized Accounts Receivable
Set up a system to ensure that you are paid. One of the hardest situations to deal with as a business owner is figuring out what to do when a client doesn’t pay. You can cut down on these situations by being clear about payment terms–have the terms printed on each invoice, and make sure they are clear when you create contracts.
Mistake 7: Neglecting Your Business Credit
Ironically the best time to seek credit is when your business is in a solid position for sign-off. The healthier your finances, the better position you’ll be in to convince a lender that you can keep up with their repayment terms. There are various types of lenders from traditional banks, to cash advance providers and specialty lenders. Each lender will have their own focus, interest rates and terms which will vary widely. Make sure you do you research to find the right fit, to take your business to the next level.
Mistake 8: Lack of Tax Planning
Finally, remember that tax planning for your business might be different than tax planning for your personal finances. You can be hit with a large tax bill if you aren’t careful. Just as you work to reduce your tax liability in your personal finances, you also need to make sure you are on top of your business taxes. You can save a lot of money–and keep your business afloat for longer–when you pay attention to taxes and take steps to legally reduce what you owe.
There’s no reason to be one of the businesses that fail, at least when it comes to financial reasons. Good enough there have been many before you who have tried and tested the long journey of being a successful entrepreneur. So, learn from those who came before and avoid their mistakes. Plan your business finances carefully to avoid the worst mistakes, and you’ll have a better chance of long-term success.
Photo credit: impacttfs.com.au