Running a small business often means wearing multiple hats. One moment you're a manager, the next you're a marketer, then a customer service representative. While juggling these roles, small business owners are prone to making mistakes, particularly in the area of finance. Here are the ten most common financial mistakes small business owners make and how to avoid them.
1. Not Having a Detailed Business Plan
A business plan is an essential roadmap that guides the direction and growth of your business. In an eagerness to move forward, some owners ignore this step, resulting in lack of focus and unclear financial projections. Always draft a comprehensive business plan that includes detailed financial forecasts. Ideally, you should write up a business plan before day one of operations. But if you’ve already started your business, it’s not too late. Draw up a business plan and review it periodically. You’ll find that your business plan is helpful whenever you need to explain your business model to others, such as investors or lenders.
2. Neglecting Cash Flow Management
Cash is king in business. Mismanaging cash flow, the money coming in and going out of your business, can lead to liquidity problems, which in turn can prevent you from being able to take advantage of business opportunities. Keep track of all income and expenses, and make sure you always have enough cash to cover your operational costs. Maintain a watchful eye on accounts receivable and don’t let collections get over 30 days old. Finally, be conservative when it comes to income projections.
3. Mixing Personal and Business Finances
Commingling personal and business finances is a common pitfall. It makes it difficult to track business expenses for tax purposes and can lead to overspending. Maintain separate accounts and credit cards for your business and personal use to keep finances organized. This is a common mistake with business owners who try to wear an accounting hat as well as all the other business hat’s they’re wearing. For all accounting matters, it pays to have a CPA on your team, who will first and foremost warn against mixing personal and business finances.
4. Overlooking Tax Obligations
Speaking of CPAs, not understanding or overlooking tax obligations can result in hefty fines and penalties. Hire a CPA to ensure compliance with all the taxes your business is liable for, like sales tax, income tax and payroll tax. This is an area where your investment will pay off in large dividends in terms of IRS compliance, ensuring you’re taking the most possible deductions, making sure you’re reporting on time and more.
5. Not Investing in Professional Accounting Services
Many business owners try to handle accounting themselves to save money. But this can result in mistakes and oversights. Hiring a professional accountant can help you manage your financial records accurately and provide invaluable advice. In innumerable ways, a CPA can help your business, including with help and guidance about managing financial setbacks, and more.
6. Poor Pricing Strategies
Setting prices too low can strangle your profits, while setting them too high can deter customers. Consider all costs, including production, marketing, and overhead costs, and study your competition to develop a competitive yet profitable pricing strategy. Conduct A/B testing to which pricing gets you the best results. Also consider various pricing structures, like monthly or annual automatic payments or individual prices on specific items or services that you offer. Do some market competition investigation to see what your biggest competitors are charging for the same or similar services or products. This will tell you what the perceived value is for your items.
7. Ignoring Financial Statements
Financial statements like the balance sheet, income statement, and cash flow statement provide a clear picture of your business's financial health. Not reviewing these documents regularly means missing out on important insights about your business. If you’ve made the smart decision to hire a CPA, they’ll already be forwarding these documents to you for your review. Don’t just tuck them into a folder and forget about them. Take time to carefully go over them, then compile a list of any questions or concerns you have for your next meeting with your CPA.
8. Failing to Plan for Emergencies
Many businesses operate without an emergency fund or plan, leaving them vulnerable to unexpected expenses or downturns. This can lead to financial disaster very quickly. Build a cash reserve and make contingency plans to safeguard your business's future. A cash reserve can be as simple as a business savings account. Treat it just as you would your household savings account and only dip into it when you have a true need, or when there’s an opportunity to make it grow.
9. Over-Reliance on a Single Revenue Stream
Over-reliance on a single customer or revenue stream can be risky. If that customer leaves or the revenue stream dries up, your business could be in jeopardy. Diversify your income sources to protect your business. No single customer should represent 90% of your client base, because if they don’t pay up, your own cash flow will suffer. Also be growth-oriented in terms of building your client base.
10. Neglecting to Plan for Growth
While managing daily operations, business owners often overlook planning for future growth. This includes budgeting for new hires, equipment upgrades, marketing and possible expansion. A detailed growth strategy is vital to keep your business moving forward. This is another task that your CPA can help with. It’s like that they deal with dozens or more businesses, and have a keen eye for growth strategies that have worked for other businesses in your industry.
By staying aware of these common financial mistakes that small business owners make, you can better prepare for long-term success, successfully getting over down times that other small businesses fall prey to. Financial management can be complex, but with a clear understanding, professional help when needed, and careful planning, you can navigate your way to a profitable and sustainable business.