Common Financial Mistakes Small Businesses Make

Starting a business is no easy feat, and for many, the financial side of things can be the most confusing and overwhelming part of it all. Setting your business up for success means ensuring that you have your finances in order so that you can maximize your profits. All too often, though, small business owners make various financial mistakes that hinder their profitability and hinder their ultimate success. Here are 6 common financial mistakes small businesses make and how to avoid them:

Every business has legal obligations to pay taxes, but many end up unknowingly overpaying, simply because they aren’t structured properly and because business owners try to save money by not hiring a qualified tax accountant to help them. What they don’t realize is that they may actually save money by spending a little extra to find a competent and qualified expert to handle their taxes and ways to (legally) maximize their savings opportunities. As a business owner, you can make this process easier by staying organized and keeping all receipts and financial documents in order.

Almost every business owner will find themselves having to take on some form of debt in order to start and run their business. However, it is crucial to be cautious of how much debt you take on and the stipulations that come along with it. Taking on heavy, high-interest debt can easily cripple a new business. If your business needs to take out a loan, be sure to make sure you don’t take on more debt than absolutely necessary and make a repayment plan in advance. Also, consider finding alternatives to loans such as small business grant programs.

Did you know your business has a credit score, too? Many people are unaware that businesses have their own separate credit score and that it is equally as important as their personal credit score. Building a great business credit history is essential to securing loans and even to working with certain suppliers. Just like your personal credit score, you can check your business’ credit score at all three major credit bureaus (Experian, TransUnion, Equifax). Note that, unlike consumer credit reports, which can be accessed for free once a year under federal law, business credit reports and scores are not required to be offered for free, but this shouldn’t dissuade you from making monitoring your score a top priority.

Particularly during the start-up phase, it’s easy to get carried away by the excitement of things and make purchases that are excessive and unnecessary. If you find yourself getting swept away with accessorizing your office, ordering loads of branded merchandise and promotional materials, or business cards on extra fancy double-thick card stock, it’s time to take a step back and reassess your spending priorities.

Remember that every dollar you spend affects your bottom line, so before ordering custom furniture or an expensive coffee machine, assess whether these purchases will actually affect the success of your business in a measurable way or if you can find a more affordable alternative.

When things get tight, it is most business owners’ instinct to find ways to cut costs. Often the first thing to be cut is a business's marketing efforts, which can just lead to an even further loss of revenue. Instead, consider taking an alternative approach and figuring out why you aren’t generating enough revenue and how you can change this. Is your business not getting enough exposure? Are customers coming through your doors but leaving without making purchases? Are your products/services priced too low? Once you identify why you are not generating revenue, you can make adjustments without making drastic cost-cutting efforts.

Even successful, established businesses are not immune to slow periods, so it is essential that you prepare your business to avoid any cash flow problems. If you have no savings available, you could find your business quickly swallowed up. To avoid any issues paying employees, vendors, rent, etc. be sure to keep 2-3 months of operating costs on hand so that you can survive slow periods and stay one step ahead of the game.

A business owner has to do everything they can to beat the odds and ensure the success of their business. Avoiding these common mistakes will help put you ahead of the competition and, ideally, lead to quicker profitability and growth. Always keep your bottom line in mind and pay careful attention to your finances so you can avoid stress and focus on the growth of your business.