8 Money Mistakes Business Owners Make
vemuda.com - The world of business has a lot of uncertainties. There are times you’ll be on top and others when you’ll be struggling to stay afloat.
One thing’s for sure everyone makes mistakes but those who succeed are those who learn from them. So, below are a couple mistakes most business owners consistently make.
1. Not separating business account from personal accounts
The first and one of the biggest mistakes small business owners make is not having separate accounts for their business and personal finances. If you think you’re being smart by doing so, you’ll see the repercussions later on.
Before you start collecting revenue from paying customers, ignore the thought of how convenient one account will be and create a savings, credit card and checking accounts separate from your personal one. It makes it easier to punch the numbers for your business and plan for the unexpected.
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You can track your expenses accurately and even make sure everything is in order when the time comes to pay taxes.
This is possible because there isn’t an overlap between what you spend and earn personally and what the business is bringing in. Imagine having to rely on your memory and go through your debits and credits when your finances are all in one account.
It’s just a recipe for disaster. It’s also very easy to get mixed up with the IRS for the inappropriate personal use of business funds if you’re not careful.
Don’t fall for this, but rather secure your financial future by creating separate accounts. Then only make personal purchases from your personal account and the same for the business account. You’ll get to enjoy the benefits later on.
Another thing to be cautious about is signing a personal finances guarantee. You should never agree to this. The reason you separated your accounts was so that you can protect your personal assets and signing such a guarantee only makes you personally liable for debt.
It’s fair to risk your time and money when handling business affairs but you should never risk your personal assets and personal well-being. Never should your business take away your life and leave you high and dry.
2. Making big business purchases immediately
When you start operations, it’s only natural to want the best for your business. New computers, a posh office and employees who make your competition jealous.
But before you go through with any purchases take a step back and think it through. It’s true some expenses are a must-have and aren’t negotiable depending on the kind of business you’re starting, but you need to ask yourself if the expense in question is going to help you generate more revenue in the short term or not.
Learn to make do with the bare minimum in the beginning and go on from there. Tone down your excitement a little, don’t let your adrenaline make major decisions. Taking huge steps could lead to missteps that could mean a sudden drop in productivity, sales and branding.
Grow your business first before thinking about spending money on things that would be nice to have. Moving too fast could leave you bankrupt if you aren’t careful. So take time to come up with a well-paved plan for growth without putting everything you’ve worked to build at risk.
3. Making large personal purchases
You might have a separate business and personal account but situations come up that force you to dig into your personal funds to finance a necessity for the business.
Some will say don’t mix business with personal matters but when you have the opportunity to grow your business, it becomes worth it in the end.
Maybe you have the chance to expand into a new area or you’ve come up with a marketing campaign that has the potential to bring in high returns.
A lot of unexpected and unforeseen obstacles may appear on your way during the first year of business. You’re going to hit a few roadblocks. You’re going to fail and sometimes at a hefty cost.
If you made a rash decision and bought a car, a house or any other personal purchase and something unexpected comes up with the business, it could mean you won’t pay
yourself the following month.
Be as lean as possible with regards to both your business, and personal life especially in the initial stages while you’re still trying to grow your business.
4. Incurring credit card debt hoping to get revenue in the future
Irresponsible credit card use has been deemed the worst financial mistake made by entrepreneurs according to experts. As much as using credit cards is normal business practice, it also exposes you to debt that might arise if you mismanage your credit.
Because credit cards are very convenient, many business owners are obscured from seeing that they’re compounding their expenses and incurring interest charges each time they use their credit and fail to pay off the full balance at the end of the month.
If convenience is what you’re after, use a debit card instead. It’s not that hard for businesses to get loans, the challenge is paying it all back. And it’s not just the principal but also the interest regardless of the situation of their cash flow.
Keep in mind that even when the business goes under, at the end of the day the lender still expects you to pay back the debt.
Relying on debt financing too much evidently lowers a business ‘cash flow. With the hopes of getting debt finances a lot of businesses put up collateral. And often this comes from personal assets like houses and cars.
It might seem like a great idea to garner debt when the business needs more money but remember every loan appears on your credit report and will affect your credit rating. The more you borrow, the greater the risk for the lender and therefore you end up having to pay high-interest rates.
Tread carefully when dealing with debts. Never be in a rush and think things through because it could seriously hurt your business.
5. Not saving for emergencies
The purpose of an emergency fund is to provide prompt access to funds during critical moments. You might relax thinking that since you’re insured against property damage, product loss, and equipment repairs you’re good to go, you don’t need any other back up.
But considering the time it takes to process such claims you’d much rather reconsider your stance on having an emergency fund. One reason being, insurance may not always cover every situation.
An emergency fund allows you to continue operations and begin making repairs, and replacing any lost items or products that are either lost or stolen immediately.
Statistically, more than 80% of businesses fail because they don’t have enough cash flow. This isn’t just the money coming in and out. It’s also about liquidity and timing.
Having cash readily available could be what keeps the business running and save you from having to incur debt when you have no choice but to borrow money in the event of an emergency.
Having cash on hand also allows you to expand the business and launch a new product line strategically if you want. You have the freedom to capitalise on opportunities in the market, by buying out a competitor or buying extra inventory at throw-away prices.
Many financial advisors will tell you you need an emergency fund to cover unforeseen financial issues like home repairs, medical expenses, job loss that may happen in your life.
The same thing can be said for your business. Businesses can experience unpredictable challenges, and while loans may help you out in such instances, it might not always be the best option for your business.
6. Neglecting to plan for upcoming tax obligations
Different types of businesses have different state and federal tax obligations, which allow the government to finance infrastructure and programs that are beneficial to citizens.
Those who are employed, are usually given forms by their employers every year to file income taxes. But as a self-employed individual, taking initiative and paying your full tax obligations throughout the year is your responsibility.
Being self-employed or as a corporation you have to make estimated quarterly payments to the IRS so that when the time comes you aren’t stuck with a huge tax bill.
Calculating this accurately takes time and effort so plan accordingly because this is all part of being a business owner. It might seem straightforward but a lot of thought needs to be put into it. Consult your accountant on this and do what needs to be done.
You might lose money during your first year, which happens to a lot of business by the way, but filing a quarterly tax report shows that you don’t owe anything. Save yourself from unnecessary trouble and get your taxes in order as soon as you can.
7. Not setting a clear budget for your business
As a business owner, it’s your job to steer your new business towards profitability and this can only be done if you have a carefully planned budget for marketing, operations and other expenses.
Not having a clear idea of how much you’ll bring in and how much it’ll cost to get it most definitely means you’re heading straight for failure. One could say you’re flying blind.
Having a clear plan is vital for your business’s profitability. Your estimate might be close to nil, but with a budget at least you’ll know how long it’ll take to start bringing in money.
Set a number of budgets, for each stage especially for your first year in business. You could have one a month before the official opening, another for after you launch your next product and so on. You could alter whatever comes in between depending on the circumstances.
If you’re new to the game, there are a number of industry associations that help estimate expenses and even probable income for you. Don’t turn them down immediately as they could help you plan for the growth of your business.
8. Refusing to invest in professional services
Business owners take on a lot of roles and eventually it all becomes a little too demanding. You can only do so much. Yes, the world of business needs people who can wear many hats but at times the business suffers when you try to do everything on your own.
Many new business owners make this mistake and aren’t willing to delegate responsibility. It’s crucial to your business’s success and personal well-being to have staff who can help grow the business. It doesn’t have to be a one man show.
As a business owner, it’s on you to identify your strengths and weaknesses and where you’re not particularly strong in, hire someone who is. This allows you to focus your attention in areas where you can add the most value.
Don’t forget that your time is worth a lot. You might save money doing a lot on your own, but it doesn’t necessarily mean you’re making the best financial decision.
In conclusion, you won’t always make the right decision every time but there are simple mistakes that can be avoided from the get-go.
Hopefully, you’ll take this advice and by doing so create a very successful and profitable business. Thanks for reading guys. Have a great day and I’ll see you all in the next one.