Owning a small business is a risk and an investment – especially financially. It might just be the most financially overwhelming task there is, and too often small business owners commit mistakes that put their hard-earned money and their business at stake. Here are the six most common money mistakes most small business owners make (and how to avoid them!):
- Not having a business plan
They say never go into battle unprepared – this rings true in running a business as well. Having a business plan is critical, whether or not you’re seeking startup capital from banks or investors. A business plan will help you get a clearer and firmer stand on what your business is and what the realistic needs are to achieve your business goals. A good business plan will include a complete business overview, a marketing and industry analysis, financing needs, contingency plans, a strategy backed up by statistics and facts, implementation, and realistic and structured goals.
- Impulse spending
Starting your own small business is exciting – but don’t get too excited. Sure, there are things you envisioned your business having when you first dreamt it up – an expensive drink machine, state of the art desks, etc. – but if it’s something your business can live without for now, then you can spare yourself the expense. Be smart with your spending, less you take away from your business’ bottom line and profit margin.
- Not keeping track of tax deductions
Keep your receipts! For most cases, except for lodging, receipts are necessary for deduction for expenses of more than $75. Most small business owners take small expenses for granted, but these deductions can add up and over time, will make a difference. Understand the tax system and codes to avoid overpaying. Keep track of all your expenses. All this will come in handy for you come tax season.
- Mixing personal and business finances
Always, always keep these two things separate. While it may be tempting, it’s a crisis waiting to happen. Not only will you have a hard time keeping track of your business’ actual expenses, it will also be difficult to tell if your business is really profiting or not. This will also be a hassle come tax season when you will be driven to determine what is deductible on your form. Keep a separate account for your business, and keep it that way.
- Not having a cash safety net
You need money to make money. As an entrepreneur, you must always remember that cash flow is not always constant. There are times when it’s good, and times when it’s bad – it’s just business. Because of this, it’s important to always have cash savings on hand for when things are on the not so good scale. Make it a point to save at least six months’ worth of operating cash, this is a good way of protecting your business and your assets.
- Waiting too long to seek funding
As a small business owner, you must always remember that things won’t always go your way. You might find yourself in a situation wherein your business’ income or the cash you have saved up for emergencies are not enough to cover paying bills, paying your employees, marketing ventures you feel your business needs to grow, etc. The hardest time to get a business loan is when you need it the most, and the best time is when you are at your most solid for an easier process. Despite this, however, you still might not get a traditional loan from a bank. Don’t let this discourage you. Most alternative lenders, such as Ironwood Finance, only require an application and copies of your last three bank statements.