5 Financial Mistakes To Avoid With Your Small Business
Starting a business can be very challenging. You need to keep in mind so many things: creating a business plan, hiring the right people, finding your customers, building a marketing strategy that will increase your brand awareness and much more. You need to establish all your operations while keeping your finances under control. In the fast-paced business world of today, financial mistakes are the probably the most common ones. Even the smallest errors can sometimes have a significant impact and cause damage to your organization. In this article, I’ll discuss some of the common financial mistakes of early stage-startups and small businesses.
Failing to Differentiate Revenue From Profit
Once you come to the point when your business is generating revenue, it’s easy to be fooled by numbers and get excited about your “success”. To avoid making this mistake, it’s important to learn the difference between revenue and profit. These are two very distinguished parameters and you’d be surprised how many young entrepreneurs fail to see it at first. Calculate your revenue by adding up all the money your company has earned in a month/year. Then subtract your total expenses (taxes, salaries, office rent, subscription to the tools your team uses… ) and you will calculate your profit. This end number (profit) should become the focal point of your analysis.
Combining Personal and Business Funds
If you are like many new entrepreneurs, there’s a chance you’ll get an idea to merge your personal with your business funds. Even though you might think that this is a convenient way to manage your accounts, the truth is – you’re setting yourself and your small business for financial failure. This single mistake can create many headaches in the long run, so try to avoid it. Create separate accounts and use them appropriately. If you need to book a personal holiday, use your personal account, and if you need more money to cover your business expenses, use an emergency fund.
Not Establishing an Emergency Fund
Always have an emergency fund – you never know what could happen. Don’t rely on your family and friends for finances. It’s a great thing to know that you can count on someone to back you up financially should you need it, but don’t take that for granted. Instead, estimate risks in your industry, follow the market fluctuations and determine how big the emergency fund should be. Start putting the money away as soon as cash starts coming in. The more money you put aside, the more bulletproof your business will be in unpredicted events.
Poor Record Keeping
To entrepreneurs without great organizational skills, record keeping can be a tiresome responsibility and often ends up last on their monthly to-do lists. Your records are the best indicator of the state of your business. You should always keep a close eye on balance sheets. Determine whether your profits are increasing, are there any payments to be made, how much money you spend on salaries and what changes you need to make to balance it out. For example, you can make a big mess if you’re not in control of your employee timesheets. To minimize the potential mistakes, you can use a free time tracker that gathers this information automatically. Allocate specific time each week/month to analyze collected data and keep track of your productivity and cash flow.
Failing to Pay the Tax
While nobody likes to give money away, paying taxes is a non-negotiable responsibility. Fortunately for small businesses, there are a lot of ways you can increase your deductibles and lower your expenses. For instance, if you work at a home office, you can deduct this from your tax. If you’ve just founded a startup, you can write off up to $5,000 in startup costs immediately. Preparation is key to success when it comes to taxes. If you keep track of all the ins and outs properly, filing your taxes won’t be so traumatic.
We all make mistakes. This is especially true for entrepreneurs. Many small business owners often fail to see the small details which can ultimately cost them a lot of time and money. It’s perfectly fine to hire a professional to help you out with things you don’t know or understand. Take the time to carefully plan every business move you make and you will ensure much greater chances of survival for your business.