Small business owners get to choose the direction of their company, set their own hours, and enjoy freedoms and benefits. But they also worry about debt, taxes, and financial problems.
The Small Business Administration says that 22.4% of new businesses fail in the first year. More than half fail within five years.
Companies fail for many reasons. Some owners don’t know how much work it takes to make a profit. But for many, financial mistakes make success hard. Budget or tax errors can cause problems. Many mistakes can cause bankruptcy and destroy a business.
By learning about common money mistakes that businesses make, you can take steps to avoid them. Let’s dive in.
Mistake #1: Not Making a Business Plan
A business plan is a document showing the company’s goals and how to reach them. An owner may be so excited to start their business that they don’t take time to make a plan first. But without a plan, it’s easy to get lost when problems happen.
A business plan is necessary to get a bank loan or financial help from investors. It shows you’re working toward your goals. It also shows you’re meeting targets and can help you see if your company is doing well. Without a plan, it’s hard to know if you’re on the right track.
Mistake #2: Mixing Business and Personal Funds
Mixing business and personal money can raise your risk of debt. It will also make it hard to see your business’s cash flow and track its overall financial health. This is especially problematic during tax time or when you ask for a business loan where you need an accurate financial picture of your business.
To make things easier, it’s a good idea to make separate bank accounts for your business and personal finances. These include savings, checking, and credit card accounts. Never use business money for personal things and vice versa.
Mistake #3: Keeping Inaccurate Records
Building on the previous mistake, make sure to keep accurate records for your business. You need this data to track spending. You also need it to measure success, calculate tax obligations, and meet reporting requirements.
If you use inaccurate records, you can’t see your profits and losses. Investors and lenders will want to see records of your finances to help them decide if they want to invest or approve your credit application.
Mistake #4: Failing To Budget
A budget is a plan for business spending over time. A small business may plan budgets daily, weekly, monthly, quarterly, and yearly. This depends on your industry and the type of work you do.
A budget should help you make a profit. It works with a business plan to guide your money choices early on.
Besides planning spending, you should update your budget often. Account for any income, strategy changes, or business growth. Set best practices for yourself and employees. This will help you stick to your budget for all business spending.
Mistake #5: Avoiding All Debt
Debt is almost sure to happen for startups and small businesses. Most companies need to invest before they make money. Your business could have a high debt-to-income ratio if you don’t borrow wisely. But if you get loans to invest in things that help your business grow, debt can be good.
This “good debt” can help your business grow well. It can build your credit history if you pay it back on time. But avoid debt that won’t help your company. Also avoid debt that doesn’t fit your budget and business plan.
Good debt is debt you thoughtfully take on to increase your business income.
Mistake #6: Using Credit Cards Improperly
Some owners think it’s easier to use credit cards for startup costs, believing that business loans are too much of a hassle. But credit card debt has problems. First, interest rates are often much higher than those of loans. Coupled with late fees, monthly payments can start to feel unmanageable.
If you use credit cards to pay for startup costs, it could also hurt your company’s credit if you have a high credit utilization ratio or miss payments. This could affect your ability to apply for loans and credit cards in the future.
Consider choosing a business loan instead. If you already have credit card debt, look for a business debt relief option. This can put you back in control of paying off your debts.
Mistake #7: Spending Too Much
Some owners spend on things that don’t help their business grow, leaving them without enough money for things that would truly make a difference in their revenue. Overspending can also leave you unable to pay for surprise costs or changes to your plans.
You can avoid overspending by making and sticking to a budget. Focus your efforts on only buying things that you need to reach your next goals.
Mistake #8: Not Spending Enough
On the other hand, owners who spend too little on their business may also have problems. Companies can’t succeed without investing in what they need. This includes equipment, services, marketing, and growth.
Mistake #9: Undercharging Customers
Small business owners may think they must charge less than others to get business. You may get more customers at first, but your profit margins may be too low to sustain your business. Also, customers may actually value your services less and not stick around for the long run.
You can avoid this by finding ways to compete besides lowering prices. For example, consider how you can provide better service, selections, or products. You’ll be able to keep a healthier profit margin while providing value that keeps customers returning to you instead of competitors.
Mistake #10: Getting Behind on Taxes
A business needs to pay sales tax, payroll tax, and income tax. Depending on your industry, you can pay monthly or quarterly. Paying taxes on time can help you get deductions for things like business costs, travel costs, and investments. This can lower your tax bill.
If you don’t pay your taxes on time, you can face penalties. Even companies that make honest mistakes may have to pay fines. That’s why it’s important to work with an accountant or keep your tax software current.
An accountant can also make sure you’re taking advantage of any deductions or tax credits you qualify for and that your business is filing taxes in a timely manner.
Wrapping Up
Good money habits are truly the heart of a strong small business. Knowing about common money errors can help you guide your company toward success.
Smart planning, careful spending, and organized records are some of your best tools. A bright future awaits you when you handle your money wisely!
