It’s two weeks until Halloween, so it’s time to talk about some things that can keep small business owners awake at night! We explore four financial mistakes that small businesses frequently make as well as steps to take to avoid them.
Inadequate Record Keeping
The first mistake businesses make is not keeping accurate and organized financial records. Many small businesses, especially new business owners, neglect this aspect, leading to confusion and errors in financial reporting, especially around tax time. Inadequate record-keeping can result in difficulties in securing loans or investment, losing out on deductions on your taxes, and regulatory compliance issues that lead to fines or even inability to legally operate your business.
How to Avoid It:
Spend some time designing a filing system and getting your accounting software set up correctly. It’s generally a good idea to hire a professional bookkeeper or accountant to help with this as well as provide some training to make sure things are being done right… a small investment now will save a ton of time and money later. Keeping meticulous records of all income and expenses, maintaining a separate business bank account and debit card, and reconciling your accounts regularly will help immensely. This level of detail ensures that your financial records are not only accurate but also readily available for decision-making and tax purposes.
Neglecting Budget Planning
One of the most common financial mistakes small businesses make is failing to establish a structured budget. In their eagerness to jumpstart operations, business owners often bypass this process and run into money shortfalls such as overspending, misallocation of resources, and insufficient funds for critical business functions.
How to Avoid It:
Take the time to develop a comprehensive budget that includes all expenses - operational costs, marketing, legal, accounting, taxes and licenses, payroll, etc. If you’ve been in business a while, you can look at past expenses and tax returns; but, if you’re a new business, it makes sense to talk to a professional to think things. It’s important to regularly review and update this budget as your business evolves so you can plan your growth and have a good idea about financing needs. Having a clear financial roadmap will make you better equipped to make informed decisions and ensure that your business remains financially stable.
Ignoring Cash Flow Management
Cash flow management is the lifeblood of any small business. Many entrepreneurs and small business owners underestimate the importance of maintaining a positive cash flow, which can lead to severe financial difficulties. This is especially true when you have employees and payroll to meet. It’s also absolutely critical in businesses that have long payment terms between when the products or services are delivered and when the payment is received.
How to Avoid It:
Implement a robust cash flow management system and keep a close eye on who you owe as well as who owes you. If you identify an issue with paying suppliers, reach out and let them know sooner rather than later as they’ll be more likely to extend payment terms. Likewise, be proactive in following up on overdue invoices and sending friendly reminders. It may also be sensible to establish a line of credit to provide a safety net during cash flow fluctuations. Working with a professional to help understand the impact of cash flow can give tremendous peace of mind.
Overlooking Tax Planning
Taxes can be a significant financial burden, especially LLCs and S-Corps that pay business taxes on personal returns. Many small businesses and entrepreneurs only focus on their tax obligations during tax season, which can lead to costly mistakes. Failing to plan for taxes adequately can result in unexpected expenses, large payments or fines, and missed opportunities for tax savings.
How to Avoid It:
Work with a firm that’s experienced in structuring your operations in a tax efficient manner. Create a tax strategy that can structure your expenses, optimize deductions and credits, and find ways to reduce taxable income while remaining compliant with tax laws. Regularly review your financial statements and consult with your advisor to ensure that your business is well-prepared for tax season.
In conclusion, small businesses can thrive when they avoid common financial mistakes. By diligently planning their budgets, managing cash flow effectively, prioritizing tax planning, and maintaining accurate financial records, entrepreneurs can build a strong financial foundation for their businesses. Steering clear of these errors is crucial for long-term success and growth.
- John Thrush