Financial pitfalls are easy to avoid if you’re aware of them before you start your business. However, many don’t arise until the wheels are in motion.
Most business owners prior to COVID-19, for example, couldn’t have expected 62 percent drops in revenue just two months into the pandemic. Such is the often unpredictable nature of business, and it helps to be vigilant.
In this article, we’ll be showing you how to do just that. And we’re going to do it by highlighting the ten most common financial pitfalls you’re likely to face.
1. Mixing Personal With Business
One of the most common financial pitfalls business owners face is mixing personal and business expenses. It can be easy to use business funds for personal purchases or to unintentionally mix business and personal accounts.
This creates a number of problems. It complicates tracking business expenses and income. It negates one’s ability to make sound financial decisions for the business.
Furthermore, it can lead to issues with tax liability. Businesses are subject to different tax laws than individuals, and failing to accurately track business expenses can result in fines or penalties. Finally, mixing personal and business finances can create problems if the business is ever sold or liquidated.
2. Undermining Your Cash Flow
Without a clear understanding of where your money is coming in and going out, it’s easy to overspend and quickly find yourself in financial trouble. It’s a pitfall that affects about 41 percent of small businesses.
Small businesses need to develop a strong system for tracking their cash flow. This should include regular monitoring and analysis to ensure that there are no unexpected surprises.
They should have a clear idea of when receivables are expected. They should also stick to payment schedules for payables and avoid the temptation of overpaying on debt or expenses when there’s a surplus.
3. Choosing the Wrong Legal Structure
Another of the financial mistakes that business owners make is failing to decide how they will do business. For example, choosing not to incorporate your business.
If you go this route, you may be personally liable for any debts or legal liabilities incurred by the business. This means that your personal assets, such as your home or car, could be at risk if the business is sued or unable to pay its debts.
Additionally, failing to choose a business legal structure is poor tax planning and can result in higher taxes. The IRS taxes sole proprietorships and partnerships at individual tax rates, which are generally higher than the rates for corporations.
4. Growing Too Quickly
Businesses should keep a robust amount of working capital on hand for unforeseen expenses and liabilities. Too many forge ahead with growth plans before they’re secure enough to do so.
Don’t fall into a false sense of security because the business appears to be outpacing expected growth. Stick to your plan and grow at a moderate rate.
5. Poor Inventory Management
Businesses should track their inventory levels carefully and plan accordingly for fluctuations in demand. They should strive to maintain efficient inventory turnover rates by keeping accurate records of sales and purchases.
Lastly, they should price their inventory appropriately to ensure that they are not leaving money on the table. By taking these simple steps, businesses can ensure healthy profit margins and avoid the potential hazards of overbuying.
6. Trying To Do Everything Without Hiring Anyone
Hiring is one of the most important aspects of business management. It can also be one of the most challenging. In fact, you might be so frustrated by it that you decide to do everything yourself.
Big mistake. Refusing to hire staff means that you will have to do all the work yourself. That means even things you’re no good at.
It also means that you will miss out on the valuable skills and perspectives that new employees can bring to the table. The short-term money you think you’re saving by doing it all yourself will create long-term roadblocks to growth.
7. Skimping On Business Insurance
While it may seem like an unnecessary expense, business insurance can actually save you a lot of money. If something goes wrong and you don’t have insurance, you could be left with a huge bill that your business is unable to pay.
Getting sued? Your personal assets could be at risk if you don’t have adequate business insurance coverage. That’s especially true if you’re still operating as a partnership.
8. Paying Employees Too Much or Too Little
Overspending on employees shows that you haven’t done enough homework on market value. Pursuing a salary study before adding staff is always a good idea. It’s best to do it on the front end so you’re not having to make cuts later.
Equally damaging is giving in to the temptation to underpay staff. This can lead to low morale and high turnover, both of which can be costly for your business. It also could make it difficult to improve your reputation as time goes on.
9. Not Paying Yourself
Why is it not a good idea to pay yourself? A couple of reasons. First, it creates a mindset that you are your business.
If the business is struggling, then you are struggling personally. You end up letting the business consume you, thus affecting relationships and happiness.
On the flip side, you don’t take the business seriously enough. This especially is true if you have another revenue stream that is working in your favor. You end up throwing good money after bad to keep the failing business on life support because you say to yourself, “It’s not losing me any money.”
But it is. Eventually, you have to decide whether the business will ever be profitable. If you end up cutting your losses, then that’s a lot of sunken costs.
10. Failing To Manage Work and Home Life
Work-life balance or work-life integration: call it what you want. But you have to leave room for the “life” part. When you aren’t managing work and life effectively, both will suffer.
These Financial Pitfalls Can Put a Stop to Every Business
We hope this look at the ten financial pitfalls will give you something to think about as you pursue new and existing business opportunities. If you’re falling victim to one or more of them, there is still time to reverse course.
If you’re in need of bookkeeping, tax planning, or CFO services for your business, Bennett Financials is here to help. Contact us today to set up a consultation and keep more of your hard-earned cash.