The Biggest Financial Mistakes Small Businesses Make (And How to Avoid Them)
Last Updated on November 15, 2022 by Selina Parker
The significance of small businesses is often underestimated. Small businesses drive innovation and create jobs in the United States. In addition, small businesses contribute to their local communities. Without small businesses, the American economy would not be as prosperous as it is today.
However, many small businesses make financial mistakes that can jeopardize their future. This article will discuss small business owners’ most significant financial errors and how to avoid them!
Importance of Small Businesses
Small businesses, although small in size, generate a significant amount of revenue. The Small Business Administration (SBA) found that in 2019, small businesses made up 44% of economic activity and delivered 43.5% of the United States’ gross domestic product (GDP). Not to mention, they create two-thirds of new jobs! It is evident that small businesses are essential to the American economy.
Small businesses often start with personal savings, retirement savings, personal loans from friends and family, or credit card debt. This can be a dangerous way to finance a company, as it can risk the owner’s financial stability. The owner is left with debt and no income if the business fails. As a business owner, what can you do to prevent this from happening to you? The quickest answer, learn from the failures of others!
What are some of the biggest financial mistakes small business owners make?
Small business owners are often fresh in the business world and have not had the time to develop financial literacy. Many small businesses make financial mistakes that can jeopardize their future. If you consider yourself a newbie to the economic scene of small business ownership, here are the most common money mistakes you should avoid:
Not Having a Budget
This is a no-brainer. You cannot manage your finances without a budget. A budget gives you an overview of your business’s financial health and where your money is going. It also allows you to make informed decisions about allocating your resources.
A yearly or monthly budget allows business owners to track their expenses and income to make informed financial decisions. Without a budget, it is challenging to save money or make investments.
Not Understanding Cash Flow
One of small business owners’ most common financial mistakes is not taking the time to understand their cash flow. It is the lifeblood of any business, yet many small business owners do not know how it works.
How are you going to make money? How are you going to spend it? These are crucial questions that must be answered to ensure your business’s financial stability.
Cash flow is the movement of more money in and out of your business. It is essential to track because it will give you a better understanding of when you have extra cash on hand and when you need to tighten your belt.
Failing to Plan for Taxes
Another financial mistake small businesses make is not planning for taxes. Many business owners are so focused on creating a profit that they forget about the taxes they will owe at the end of the year. This can be a costly mistake!
Financial windfalls such as your tax refund can help you cover unexpected expenses or make necessary repairs. However, if you do not plan for taxes, you may be in a financial bind come tax season.
Not Consistently Checking the Bank Account
The most common money mistake is being confident about the money in the bank account without frequently checking it. This financial mistake can quickly put a small business owner in hot water.
It is essential to monitor your business’s financial health by checking your bank account regularly. It is a personal finance initiative to help you catch any errors or fraudulent activity. Additionally, you can track your spending and ensure you do not spend money on unnecessary items.
Not Checking their Credit Report
A joint initiative if you own a credit card is constantly checking your credit card bill and credit reports. This way, you are aware of your credit score and can work on building it.
Your credit score is crucial because it determines the interest rates you will pay on loans. The higher your credit score, the lower your interest rate will be, saving you thousands of dollars in the long run. Many people don’t realize that the minimum payment on their credit card is just the interest rate.
Paying Late Fees
This financial mistake is often made by small business owners who are not using a budget. When you do not have a budget, it is easy to overspend and rack up late fees.
Late fees can quickly add up and put a strain on your finances. To avoid paying late fees, create a budget and stick to it. You can also set up automatic payments to ensure your bills are paid on time.
Not Saving for a Rainy Day
One of the most crucial financial lessons is always saving for a rainy day. Many small business owners do not have enough emergency funds to cover unexpected expenses.
An emergency fund is a financial cushion that can help you cover unexpected costs, such as a broken appliance or a sudden drop in revenue. This financial safety net will give you peace of mind and help you avoid debt.
Underestimating the cost of running a business
When budgeting for your small business, you must also factor in the costs of running a business. These costs include office supplies, marketing, employee salaries, and blessings.
Many small business owners underestimate these costs and end up in financial trouble. Researching and understanding all the costs associated with running a successful business is essential.
No proper financial planning
If you do not have proper financial goals to measure your progress, you will be unable to track your financial success. Financial plans will help you make informed decisions about your spending and saving.
Your financial goals should be specific, measurable, attainable, relevant, and time-bound. Without these elements, your goals are likely to fall by the wayside because there is no such thing as free money.
Lending a large sum of money they cannot afford to lose
Many small business owners make the mistake of lending money to friends or family members. While it is vital to help those you love, you should not do so at the expense of your financial stability.
If you cannot afford to lose the money you are lending, do not lend it. This financial mistake can strain your relationship and cause financial hardship.
Not having insurance
Another financial mistake made by small business owners is not having insurance. Insurance protects you from financial losses in accidents, theft, or natural disasters.
Without insurance, you risk losing everything you have worked hard to build. Make sure you are adequately insured before opening your doors for business.
These are the most significant financial mistakes small businesses make. Avoid them by monitoring your spending, checking your credit report, paying bills on time, saving for a rainy day, understanding all the costs of running a business, and having insurance. financial planning will also help you set and achieve financial goals.
Do not lend money you cannot afford to lose; always have a safety net to protect your business. Following these tips can prevent financial disaster and keep your small business afloat.
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ABOUT THE AUTHOR
“What began as a life and career coaching services company to aide entrepreneurs through the early-stage challenges and tough transformations of starting a social venture has evolved over the years to include mergers and acquisitions, organizational consulting, and business growth advisory services to mission-driven organizations that strive to improve access to basic physiological, safety, and security needs while increasing their profit margin. Clients include founders and organizations with the purpose of addressing deficiencies in delivering quality healthcare and mental health services, sufficient employment, access to clean water and air, safe shelter, adequate food, and more.”