Six Financial Mistakes Small Businesses Should Avoid
Many people dream of starting their own business, but the key to such a massive undertaking is to avoid becoming another statistical representation of failure. Based on recent studies, one-third of startups don’t make it past the first two years of operation, and 50% of small businesses fall down the drain within five years. With these statistics, it is no surprise that money management is one of the biggest and most formidable challenges for these small businesses. Money is, without a doubt, what makes the business world go round, so even mishandling can lead to significant troubles. Unfortunately, many can go wrong, from capitalization problems to budgeting to incorrect bookkeeping practices.
It is fair to say that prudent and responsible financial practices are essential to combat and prevent downfalls. To avoid going bankrupt, here are a few common financial mistakes that small businesses make. By avoiding these mistakes, you can hope for progress and achievement.
1. Not consulting any professionals
One of the most common financial mistakes most startups make is ignoring the importance of professional assistance. So it would help if you were not afraid to enlist the aid of financial professionals for your advisory and bookkeeping needs.
Many entrepreneurs start businesses because they are enthusiastic about a particular industry, service, or product. However, that does not imply they are financial experts.
Side-Bar: A CMA qualification can prove helpful if you want to upskill your finance management game and desire more growth opportunities. To qualify for the exam, you can take the Wiley CMA test bank and gain hands-on experience about how you’ll be giving the exam. It will help you clear all sections of the exam.
Now, coming back to our first financial mistake.
You may also lack the time required to give your business’s finances the necessary attention. You’re probably already handling many other responsibilities, and this is one area you can’t afford to overlook. Expert assistance can make an enormous difference and help you dodge troubles caused by your lack of competence.
2. Failing to be penny-wise
Every small business owner only wants the best for their company. Investing in cutting-edge technology, the most talented employees and the most stylish office space can be tempting. However, while they can give your startup a competitive advantage, they will also require you to spend money you have yet to earn. Making a reasonable budget, sticking to it, and remaining frugal are the best ways to keep your business afloat. Only spend your money on essential things.
Do you require that piece of furniture or equipment? Then you might want to look into other options for getting them. Perhaps someone in the family isn’t using one, and you could borrow it instead? You could also consider purchasing used or renting some. At a minimum, avoid making large purchases without a strategy.
3. Ignoring business insurance
Your company must be adequately insured and guarded. Having the proper business insurance reduces financial risk from unforeseen circumstances. Regrettably, many small business owners (SBOs) make the error of canceling their insurance before obtaining a new policy or not selecting the policies that best suit their company’s needs.
4. Failure to establish an emergency fund
The purpose of an emergency fund is to be prepared for unanticipated costs. It is a type of savings designed to keep you out of debt during a crisis. We recommend creating two separate accounts to handle your personal and business affairs. That will also keep you from using company money for personal emergency cases and vice versa. Some business owners find it challenging to identify whether something is an emergency. This information will help: Can you go about your daily life while dealing with this problem? If so, it is not an emergency. Otherwise, it is.
Your car vehicle broke down in the middle of the road, your only laptop won’t turn on, or your child was in an accident and needed to be rushed to the hospital. These are just a few examples of situations that require using your emergency fund. Another question is, how much should you save? The more money you have saved, the better. However, we recommend having enough to keep your business (or personal life) flowing comfortably for three months, even if no revenue is coming in.
5. Inability to plan for tax obligations
You will have different state and federal tax obligations as a business depending on the size of your company, what type of business you operate, where you are located, and so on. You are self-employed and responsible for paying your entire annual tax obligations. To avoid a large tax bill at the end of the fiscal year, it’s a good idea to make estimated quarterly payments to the IRS. Paying attention to how much you owe in taxes and taking the necessary steps to reduce what you owe legally will help you save substantial money. It will also help keep your business afloat for longer.
6. Not focusing on cash flow
Cash flow should be a significant priority in your company. It’s easy to get caught up in revenues. Still, without a coherent and healthy cash flow, your business may find itself in financial trouble, even if the profits appear on paper. You must constantly track and review sales, accounts receivable, and inadequacies. Don’t get caught up in having too much money in accounts receivable. Sales are significant, but getting paid quickly for them is even better. An unpaid account is not the same as cash in the bank and cannot be used to pay bills. A business line of credit can help you even out your cash flow. This idea will offer you standby funds during slow business days or while you wait for your consumers to pay you.
So these are some of the financial blunders to avoid to succeed as a small business. To avoid the dangers of overspending, begin by tracking the small expenses that add up quickly, then progress to tracking the high costs. Make sure that business owners’ most pervasive money mistakes do not become your undoing. Yes, managing money can be difficult, but it does not have to be unthinkable. You can grow a successful operation far beyond the first five years with the proper planning, exploration, and devotion.