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If you’re a small business owner, then you know that financial management is crucial to the success of your enterprise. However, even the most seasoned business owners can make financial mistakes from time to time. In this article, Creative Juices takes a look at some common financial mistakes small business owners make and how to avoid them.
One of the first things you should do when starting a small business is to choose a legal structure for your company. This will determine how much personal liability you have in the event that your business is sued. One of the most popular legal structures for small businesses is the limited liability company (LLC). An LLC offers its owners limited personal liability in the event that the business is sued, so it’s usually a better option for entrepreneurs than a sole proprietorship.
Another common mistake small business owners make is taking on too much debt. While it’s true that some debt can be beneficial for your business (e.g., taking out a loan to purchase inventory), too much debt can quickly become crippling. This is because you’ll have to make regular loan payments, which can put a strain on your cash flow.
Furthermore, if you default on your loan, your creditors could come after your personal assets, including your home and car.
Another mistake small businesses make is being inefficient with their invoicing. This can lead to late payments and cash flow problems. To avoid this, be sure to send invoices as soon as possible after a service has been rendered or a product has been shipped. You should also include clear payment terms on your invoices (e.g., “payment due within 30 days”).
Poor budgeting is another mistake small businesses make. A budget is crucial for ensuring that your expenses don’t exceed your income. Without a budget, it’s very easy to overspend and find yourself in financial trouble down the road.
If you struggle with the financial aspect of your business, consider this option: go back to school for a degree in accounting. Having a more thorough understanding of how to manage your accounting and taxation will allow you to make better financial choices for your business.
Mixing business and personal finances is another mistake small businesses make. This can lead to confusion and make it difficult to track expenses for tax purposes. Be sure to open a separate bank account for your business and use it exclusively for business expenses.
Marketing can make or break your business because, even if you have the best product or service on the market, you will fail if no one knows about you. So, dedicate some real time and money to strategic marketing campaigns. If you aren’t sure how to choose where to put your marketing dollars, work with the marketing professionals at Creative Juices. Marketing experts have seen it all and they will know how to guide you to build your business.
Poor inventory management is another mistake small businesses make. This can lead to lost sales and cash flow problems (since you’ll have money tied up in inventory that isn’t selling). To avoid this, be sure to keep track of your inventory levels and only order what you need when you need it.
Hiring the wrong people is another mistake small businesses make — one that can be very costly in terms of both time and money. Be sure to take your time when hiring new employees and only hire people who are a good fit for your company culture and who have the skills and experience needed to do the job well.
Not having enough insurance is another mistake small businesses make — one that could prove financially fatal if something goes wrong (if one of your employees gets injured on the job or if your office catches fire, for example). The Hartford recommends that you purchase adequate insurance coverage for your business — which may include property insurance, liability insurance, and workers’ compensation insurance — and review your policy regularly to ensure that it still meets your needs.
As you can see, there are many common financial mistakes that small business owners make — but thankfully, there are also ways to avoid them! Start by establishing a strong budget and keeping to it. This will prevent you from making really detrimental mistakes. And be sure that you’ve chosen the right business structure, as that can make a big difference in many ways. By applying these simple strategies, you can help ensure that your business remains on solid financial footing for years to come.