5 Common Financial Mistakes Small Business Owners Make (and How to Avoid Them)

Image from Unsplash

Article written by Cameron Ward

Did you know that over 51% of small businesses fail five years from starting out? The Small Business Administration also reports that 35% of businesses close within two years. As an entrepreneur, your main goal is to see your company succeed and achieve its business goals. You can do this by bypassing some of the more common financial mistakes small business owners typically make. In this article, learn the 5 most common blunders and how to avoid them. 

1. Neglecting Business Insurance

Lack of business insurance increases the risk potential from unexpected events. Many small business owners mistake canceling their coverage before getting a new one or choosing a policy that doesn’t cover their needs.

To protect yourself from this financial mistake, look for business insurance that covers all potential liabilities. If you need additional help figuring out business policies, check out this guide by the Insurance Information Institute on the basics of small business insurance. 

2. Late Payments

Trying to strike that balance between keeping your client happy and getting your payments on time can be tricky. But the truth is, if you’re not paid on time, then the rest of your business suffers. For example, suppose you’re in the broadcasting service business. In that case, you may need the money to hire freelance personnel or invest in technology. 

The most critical thing you can do to get your payments on time is upfront about payment deadlines. Incentivizing early payments through small discounts will also be a way to go, as will creating penalties for late payments.

3. Lack of an Emergency Fund

Over 20% of small businesses aren’t ready for a rainy day. If you don’t have an emergency fund to fall back on, you will never be financially prepared for the ups and downs of business. If you encounter difficulties down the line, you may be forced to take drastic measures like taking out an unnecessarily high-interest loan.

If you don’t quite have the cash flow to set aside money for a rainy day yet, start by opening a business savings account. Every month, put away what you can and work towards building your fund. You want to reach a point where you have approximately six months of expenses saved up in your account. 

4. Mixing Personal and Business Accounts

While it can be hard to separate your personal life from your business (especially when you’re starting out) be sure to do this when it comes to finances. If you mix the two, you could encounter mismatched financial accounts and cash flow problems. You will also not have a clear perspective on your financial goals and how to achieve them.

Separating your business account from your personal one is made more accessible when you have a bank account specifically for your business expenses. Use this account to make expenses, pay debts, and manage overall cash inflow and outflow. 

5. Not Prioritizing Cash

Cash flow is what keeps your business afloat. You need a healthy cash flow for business operations, paying vendors, and making business purchases. However, it is common for business owners to neglect their cash flow, particularly if they are currently profitable. Similarly, an entrepreneur may also fail to properly budget for their new venture. A good tip is to plan for 20% higher expenses than you budget for when starting out.

Once you’re up and running, the best way to stay on top of things is to constantly monitor your cash flow across different verticals. Have reports of expenses, sales, accounts receivables, and anything else your business needs daily. Look for invoicing software that can help you track costs accurately and get paid quickly. The ideal software for invoicing clients should have online payment mechanisms, alerts for viewing and paying invoices, and scheduled invoices for recurring customers.

Should you start to fall short, you may have to seek out a business loan. Be sure to keep your credit report in mind. If you lack substantial business history, lenders will use your personal credit report as part of their creditworthiness decision-making process. You can access your credit report through one of the major credit bureaus to investigate any abnormalities.

The first year of business is one of the most challenging. In the hustle-bustle of figuring things out, don’t make money mistakes that could be fatal down the line. After all, avoiding these financial blunders could mean the difference between your business succeeding or sinking.