It’s not as easy to run a business these days. There are so many things to consider that it’s easy to get lost along the way. However, entrepreneurs who are sufficiently equipped manage to stand out from the crowd and make their business last. But what is the secret?
The secret is of course the careful management of the company’s finances and resources, while avoiding mistakes that can be fatal. In this article, you will discover the most common financial mistakes made by small and medium-sized businesses.
Manage cash flow passively
Cash flow is the lifeblood of a business. Therefore, cash flow should be constantly monitored to stay current. Even if the business is profitable, it’s easy to be surprised by a cash shortage if you’re not rigorous about cash management.
To stay on top of things, SMEs need to analyze and track key accounts such as expenses, sales, accounts receivable, etc.
Passive cash flow management is one of the most common mistakes that cause businesses to lose money. It takes into account other aspects such as:
Making reckless expenditures
No business wants to be buried in bills. Yet, when you look at companies from the outside, you get the impression that they want to.
It has almost become a proof of success for companies. The more they spend on office renovation, branding, etc., the more successful they are.
But beware! There is much more to read between the lines.
A fundamental mistake that small business owners must avoid is dispersing cash whenever they have a little extra. You really don’t need a three-story office to get your product/service in front of your consumers.
Not having good accounting practices
Accounting is an easily overlooked aspect of small business. Yet it is essential to keep a perfect record of all your company’s income and expenses.
Keep your books in perfect order and don’t forget to record even the smallest and most insignificant of expenses. This will give you a better understanding of the cash flow and working capital needed for the business.
Underestimating loan interest rates and other costs
Over time, every business needs to borrow money to grow. Taking on debt is therefore inevitable. However, you should avoid the trap of a high-interest rate on your loan.
It is recommended that you always consider the interest rate, other charges and fees associated with the loan. To make the right choice, you can research and compare interest rates before taking on the debt.
No cash reserves for contingencies
A business that operates without any reserves is threatened by the unexpected and, worse, the urgent.
What happens when you are caught in a rainstorm without an umbrella? You get soaked. The same is true for your business. If you don’t have rainy day funds, the downpour can have a significant impact on your finances.
The mistake here is not having an emergency fund for your business. Experts recommend up to six months of operating expenses as the ideal amount for an emergency. Of course, you can build your reserve over time. Start by opening a savings account for your business. Slowly build up a reserve that will help your business weather the bad times.
Making large investments at the beginning of the business
Small and medium-sized business owners often want to do things big when they start up. Their enthusiasm knows no bounds. Investing in new technology, getting best-in-class software, hiring talented staff and creating a flashy website all need to be ready before start-up. The reality is that all of this comes at a huge cost. Wanting the best of the best to get started can cost you money. When you are in the early stages, you need to focus on the basics to test your product in the market as quickly as possible. There’s no point in wasting money while there’s still a long way to go and adjustments to be made.
Consider your buying decisions very carefully. Will the big one help you strategically grow your business and generate more revenue? That’s the question to ask yourself before making any decisions in this direction.
Not accounting for taxes during the year
The mistake here is to not account for (and plan for) your taxes during the year and end up with a surprise tax bill at the end of the year. In most cases, the company may not have enough money to cover that bill at year-end.
To avoid losing money on penalties and other unpaid tax charges, always set aside a percentage of your profits in cash so that you can pay at the end of the year without a problem.
In case you have the ability to pay your tax charges based on the quarter’s profit and loss, do it every quarter. Your annual balance sheet will thank you for it.
Mixing personal and company funds
Mixing your personal and business funds does not allow you to know the status of your business. With money flowing through both personal and business accounts, here are the two pitfalls you face:
- Jeopardize the development of your business and live beyond your means;
- Putting your personal income at the service of the business and sailing blind.
If there are times when you need to use personal funds for your business or vice versa, the proper way to handle the situation is to make a formal transaction and document it. If you have business partners, have them sign the transaction as well.
It is easier to lose money than to make it. A single financial mistake can be the cause of your business failure. You can avoid these common financial mistakes by watching your cash flow, saving for emergencies, and always spending on things that are essential to your business growth. Then you’re set for success!