9 common mistakes small businesses make – and how to avoid them
Keeping on top of your business’s bookkeeping is vital. And now more than ever, there is a wide variety of user-friendly bookkeeping applications for today’s small- and medium-sized businesses, which makes it easy to keep accurate records of where a business’s money is going. Whether it’s the business owner, someone within the company or an outside bookkeeper, someone needs to keep track of finances.
Additionally, there are a variety of things to watch for when it comes to business banking and keeping track of your business’s finances. Here are nine common missteps that small businesses sometimes make:
Spending too much in the startup phase.
New businesses often overestimate how fast they will start making money. And they might overestimate the expenses that are coming in the first year. So, it’s a good idea to skip things like lavish, oversized desks and office furniture, when modest (even second-hand) desks and office furniture are more appropriate in the beginning.
Not taking bookkeeping seriously enough and not staying on top of it.
As we mentioned above, this is a biggie. Record everything from small transactions to large. This is important – especially when it comes time for taxes. Consider a statistic from Entrepreneur.com, which says that 21 percent of small business owners say they claim less than half of their business expenses.1 And you know what that means: Those small business owners are overpaying on their taxes. Even $5 expense claims can add up, so get in the habit of saving your receipts.
Managing all your bookkeeping in-house.
Even if you’re a wiz at bookkeeping, consider an outside bookkeeper. While it might save you a few bucks to do it yourself, an experienced bookkeeper – while costing money – can actually save you significant amounts of money in the long run, especially when it comes to your business’s taxes.
Not communicating with your bookkeeper.
So, you’ve gone with an outside bookkeeper, great! But now you need to be a good communicator and keep that bookkeeper informed on your business in order to take full advantage of their services. Keeping them informed of all business expenses is vital.
Not recording small transactions.
Continuing from the point above, this is another common mistake that small business owners make. This includes keeping track of “petty cash.” It’s easy to overlook petty cash transactions, but it is essential that your business has a record of all of its spending, no matter how insignificant.
Mistaking “profits” for “cash flow.”
First things first – in order to have a cash flow, and then a profit, a business needs to have revenue coming in. In other words, you need to sell your widgets, your big idea. Once you have sales – and hence revenue – coming into your business, you have cash flow. Cash flow is used for the daily operations of your business, such as paying taxes, purchasing more inventory to make more widgets, paying employees and other costs. Profit is the money left over after those expenses have been deducted from the revenue. Simple, right? Then why do so many profitable businesses fail? Typically, because of bad cash flow. Being profitable isn’t enough to run a business efficiently. For a business to grow, it needs to operate with a positive cash flow (paying all those expenses) first and be profitable.
Not keeping a cash safety net.
To further the point made above, cash flow can have ebbs and flows. Therefore, having a cash safety net is essential to your business. A safety net can be made up of a cash reserve or access to cash via a business line of credit, a business credit card or other finance sources. The bottom line is that by having a cash safety net you will sleep better at night.
Mixing business and personal funds.
A big no-no. Which is why having a business checking account separate from your personal checking account is essential. You should never deposit checks/funds made payable to your business into your personal bank account, and you should never make withdrawals from your business checking account to pay personal expenses without documentation. It can make bookkeeping difficult and inaccurate. Bookkeeping tells you how your business is performing, so if you have sloppy record keeping you might have a hard time deciphering if your business is doing well or poorly.
Failing to create a budget, or not being able to stick to the one you created.
It’s just like with your home and household budget – a business also has specific debt obligations, bills to pay and other expenses. And just like your household budget, a budget for your business allows your business to track where it stands financially. And it allows you to make long-term goals and plan your operating costs based on that budget.
Helping grow your business.
In the end, as a small business owner you’ll come to learn that small business is never small. “Whether you’re overcoming startup inertia or maintaining success, the business of small business takes strength,” says Clint Sporhase, Vice President of Business Banking at First National Bank of Omaha. “From small business checking and savings accounts, to online banking for businesses, our business bankers exist to help business owners achieve their visions.”
If it’s a credit card you need for your business, “we make it easy with itemized purchase reports, rewards, discounts and other benefits for on-the-go businesses,” Sporhase says.
“With our online banking for businesses, you can use a customized dashboard to manage your accounts, pay bills and other aspects of your business’s finances – ultimately all this allows you to spend more time helping your business grow.”
1"6 Financial Mistakes Small Businesses Make All The Time," March 2016, entreprenuer.com- https://www.entreprener.com/article/271374