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8 Common Financial Mistakes That Can Hurt Your Business

8 Common Financial Mistakes That Can Hurt Your Business

Starting a small business? Avoid common money mistakes like poor budgeting, overlooking taxes, and mixing personal with business funds. Learn how to navigate financial hurdles for success

Diving into the world of running your own small business can be pretty awesome. Many people opt for it instead of the regular 9-to-5 scene that doesn't quite match up with their lifestyle. But, you know, being your own boss means dealing with unexpected hurdles and tasks you might not have thought about initially. Navigating through financial blunders in the early stages keeps your money safe and stops your business from tanking up before it even takes off.

So, let's talk about eight money mistakes that could seriously throw a wrench into your small business dreams!

When you're launching your own business, making mistakes can lead to some tricky situations. Here are the top 8 slip-ups you should steer clear of.

1. Budgeting Blunders

Starting a business often means estimating what you need to buy and how much it will cost. Especially if you're footing all the bills from your own pocket, it's tempting to believe you'll stick to a reasonable limit because you're the one deciding when and how much to spend. Unfortunately, this mindset is why one in five companies with ten or fewer employees skip making any kind of budget, and around half of small businesses don't bother with a written budget, according to Clutch's research.

The issue with this approach is that you're essentially running your business on a gamble, leaving profitability to chance. Without a clear plan, reaching your business goals becomes a tricky—if not impossible—task. It's crucial to create a budget in advance. Sure, you can tweak it as needed, but having a written plan keeps your objectives in focus, guiding your efforts toward success.

2. Overlooking Loan Interest Rates & Additional Charges

Watching out for loan interest rates is a big deal in handling business finances. Ignoring this can lead to shelling out a hefty sum over time. To keep your finances stable and cut down on unnecessary costs, it's essential to explore and compare the best loan interest rates. 

Choosing favourable rates can save your business money, letting you use funds more wisely for growth instead of drowning in high-interest payments.

3. Poor Cash Flow Management

Remember the earlier situation where a business faced a cash crunch before paying its employees? That's just one-way companies mess up their cash flow management. It could be due to clients not paying up, overspending, settling bills too early, etc. Ineffective cash flow management also means not making the most of your money. 

If your cash is just sitting in the bank, not doing anything, you're holding back its potential instead of investing in your business's growth. According to the National Federation of Independent Business, issues with cash flow management contribute to 82% of small business closures.

4. Jumping into Big Purchases Too Soon

When you're setting up a business, there's a ton of stuff you think you need—equipment, office supplies, inventory, and maybe even some fancy machines or vehicles. And sure, you need space to run your show. But here's the catch: just because you need it doesn't mean you have to buy it right away. This is a classic business blunder.

Swiping the credit card for big buys too early can leave your pockets feeling empty. Plus, you might end up paying more in financing costs than if you'd waited until your business was in a better money groove.

Instead, start with the essentials your business can't do without, and opt for the budget-friendly versions. Hold off on the shiny, high-end gear for now. Shop around to sniff out the best deals, and if you're eyeing something pricey, explore all your money options—like equipment financing or invoice factoring—to make sure you're getting the best financial boost for your business's growth.

5. Overlooking Taxes

Effective tax planning and management are crucial for any small business. Not paying attention to taxes is a major financial blunder that can seriously harm your small business and potentially lead to trouble with the Income Tax Department. Even a brief neglect of tax responsibilities can snowball into significant issues down the line.

Failure to file taxes correctly increases the risk of a tax audit, resulting in penalties and more money going out of your pocket. It's a risk not worth taking! As an entrepreneur, part of your crucial responsibilities is ensuring all paperwork is filed on time and includes all the necessary details.

6. Letting Unpaid Invoices Slide

A prevalent issue we often observe is business owners neglecting to chase payments from their clients. Numerous studies have shown that a whopping  64% of small businesses have invoices left unpaid for more than 60 days. This oversight is a massive mistake, especially considering how crucial a healthy cash flow is for a business. If an owner isn't closely monitoring the money coming in, they might end up short on funds to cover their expenses.

7. Skipping the Emergency Savings

Unexpected things can throw off your business plans—like a crucial piece of equipment breaking down, your supplier raising prices out of the blue, or your top-paying client missing a deadline. Without a stash of emergency cash, you might end up resorting to high-interest loans or less-than-ideal funding sources to handle these surprises.

8. Mixing Business with Personal

In life, we're often told to keep our personal and professional lives separate. The same goes for small business owners, even though it's not always easy. Unfortunately, many small business owners make a common financial mistake by not keeping their business and personal finances apart. 

Studies show that over a quarter of small business owners blend their business and personal funds. It might seem logical—you use personal funds for business expenses, and you may be the sole earner taking money from the business as needed.

However, this practice makes it tough to assess your business's financial health and manage your budget effectively. It can lead to complications during tax season and may hinder your chances of securing a business loan in the future. To avoid major financial missteps, always maintain a dedicated business account and keep your personal funds and expenses separate.

Closing Thoughts

Avoiding these common financial mistakes is like having a roadmap for your business journey. By steering clear of these pitfalls, you're better equipped to navigate the financial waters and set your small business on the path to success. Here's to making smart money moves and watching your business thrive!

Sam Makad is a business consultant. He helps small & medium enterprises to grow their businesses and overall ROI. You can follow Sam on Twitter, Facebook, and Linkedin.

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