12 common financial mistakes business owners make
As a business owner, you might encounter many challenges your way. One testing problem that exists throughout is finance management. A small mistake can damage your capital.
Hence it’s good to be aware of financial mistakes business owners make and avoid them. The modern business ecosystem makes it easy for new business owners to start something new on their own.
If they are also equipped with financial knowledge and know what’s not to do, they can make maximum ROI.
Not all business owners have a degree in business management, let alone financing. With less guidance around, they are more likely to make mistakes as the capital amount is high.
Here are the most common financial mistakes small business owners make that could be avoided.
Many new business owners commit the mistake of mixing their business with personal finances. The amount of money they use for business is negligible during the starting phase.
Hence they don’t realize the need to not use their personal bank account for their business. Not just the spending, but the earnings too go into your personal account.
So, there is no way you can track and find what’s spent and what’s earned (unless you go through your statements for hours). The mindset of seeing the business as a separate entity must be instilled right from the start.
That’s when you will consider finances seriously and start monitoring every penny that’s spent. It also makes tax filing easy as you can have separate financial records.
Storing the financial records right from the first day of your business can help while planning budgets. Hence, the first thing you need to do right after registering your business is to get your business bank account and credit card.
Another common financial mistake business owners make is not caring about calculative spending. In the beginning, things will be a bit unclear, and every possible opportunity will require investing more money into it.
Lured by it, business owners get carried away and spend their money on everything. Some finance teams make serious budget plans but implement nothing while spending.
But if your company has already drawn strategic goals for the current quarter, it’s much more straightforward to plan flexible budgets from here. Budgets tell you what’s allowed for a certain expense category.
Now it’s the teams’ responsibility to find feasible solutions that fit within this. For starters, simply list down your expenses and categorize them. Estimate the amount needed for each expense category. List the variable expenses too, and their allowed limits.
Now compare it with the income you will earn during this period. Be generous when it comes to estimating expenses, and keep your income estimate at lower levels.
Making budgets is essential as it teaches you how to adjust your spending based on your sales and revenue. It also makes you consider every expense you will possibly incur.
If there can be a blueprint that explains the structure and functions of your business, that’s the business plan. Having no business plan is like playing a game with no scorecards and points — there’s no endgame.
A business plan is a foundational document that explains the goals your business will achieve, when, and how they will be achieved. Without a business plan, your teams will lack direction and have difficulty assuming their goals and standpoints.
It’s good to commence your business processes with a well-written business plan. But what’s the connection between the business plan and finance? A business plan can also help you derive the finances you will possibly need to start and run your business.
Many founders avoid putting time into this as they think business plans are only for getting funding support. This is a myth, as a business plan can be used to set milestones for different teams for the upcoming year or even for three to five years.
Many founders don’t think of tax as an expense until the tax period arrives. Putting this task to do at the last minute causes additional stress. And not planning them only increases your liability.
You need to start planning tax liabilities from the very start, whether it’s applicable or not. Many startup owners neglect this only to find out a huge tax liability along with added penalties.
Every country and region has its own taxation structure. Some locations are tax-friendly and offer many exemptions for new business owners. Not finding this on time will be a loss for you.
Do your research and find out the benefits you can avail yourself of. Your individual and business tax liability also depends on the business structure you choose. Hence, prioritize this while making your business plans and planning your expenses.
There are two types of new business owners. One saves up every penny and makes way for their new business through bootstrapping, and another takes up business loans and other financial assistance.
There is no problem with both. But overloading your business with debts and taking more than necessary will be realized only when you repay it. Remember the business plan you made?
That’s your guidance here to decide how much you need for smooth running. While a business loan is a great way to secure huge capital in the short term, that’s not the only way. There are other ways to raise capital.
You can look for investors or venture capitalists, tap into your savings, or get help from family and friends. If you don’t make the expected revenue, repaying the huge debt will be an uphill climb every month.
Every late due payment will cause a dip in the business credit score. Low credit scores don’t look good from the banking point of view and reduce your chances of getting further financial aid.
Make a proper financial analysis, calculate your modest requirements, and then run to a bank after trying out other funding methods.
Every business, at some point, goes through the business registration process and chooses a structure — let's say LLC, corporation, sole proprietorship, etc. Startup owners find this step unnecessary and put it off.
More so, choosing a legal structure can be confusing as it impacts the power, authority, and liability of business owners. But registering a startup also has many benefits. Each country has its own rules and norms for business structures.
Their properties are more or less the same everywhere except for a few changes. Based on that, the most suitable business structure for startups is LLC. It makes owners liable only for what they invest and protects their personal assets.
Registering a business will help you in the future when you expand your business. Also, getting financial assistance from banks is also possible as your business is made official.
This is also one of the familiar financial mistakes business owners make. As soon as you start your business operations, you will notice an ocean of expenses. But you may or may not have the funds to meet them.
Having a low starting capital limits your operations and doesn’t let you make even the essential payments. You cannot fully rely on an inconsistent and non-existent income.
This is where you are supposed to gather funds to build your working capital. Your initial working capital must be enough to cover your basic expenses for at least 6 months.
As seen before, you can try any one of the available fund collection methods. After hearing gory debt stories of failed startups, startup owners hesitate to ask for help.
They try to make ends meet with what they have. As long as you know your requirements and go for the readily available, safe financing option, you will be able to repay in quicker terms.
Suggested read - Net working capital: Everything you need to know
It’s okay to be optimistic. But a common financial mistake startup owners commit is being too optimistic and stocking up more than required.
If you buy raw materials more than necessary or produce more stocks and put them in inventory, you are messing with the cash flow. You also need to spend more to maintain these additional stocks.
Instead of tying up stocks and resources and wasting raw materials, produce what’s necessary.
The price you set for your product determines your profit margin. If you set lower prices at the start in an attempt to impress customers, you will make a profit and find it hard to sustain later.
Do an in-depth analysis of the market pricing and competitor pricing before you fix a price for your product. All this must be done at the start.
If you sell at lower prices during the start and increase it later, your customers will think it's unfair and move to alternative providers. But eventually, you will be forced to increase the price anyway to cover the operating expenses.
Hence, it’s always better to develop an unbeatable product/service, price it a little above the market average value, and find customers who are willing to invest.
Selling fewer products at higher prices is still more profitable than selling more products at a lower cost.
If your business has many physical assets and properties, it’s best to apply for insurance to protect them. Small business owners, unfortunately, find this as an additional liability and don’t focus on finding decent coverage.
They rather cancel their coverage plans or choose plans with lesser premiums that don’t guarantee full coverage. If it’s hard to choose what fits your business, go for professional help and find the best policy.
Your business credit score is an indicator of how quickly you make debt and vendor payments. It’s very hard to pick up a negative score and bring it back to positive values.
But when you have good repayment habits from the start, you can easily build positive credit and maintain it. Many businesses spend a year to two to build their credit and specifically get credit from financial institutions for this very reason.
This is one of the most common financial mistakes almost every founder makes. Negative credit scores affect your partnership with vendors and reduce your chances of getting a business loan.
Emergency funds must be there for both personal and business purposes. Talking about the business environment, you will never know what will hit you.
To be prepared and keep the business afloat in emergency situations, you will need an emergency fund depending on your business stage, your fund amount can vary.
Typically, an emergency fund should cover two to three months of your business expenses. When you receive funding or start making profits, keep it a habit to save some aside.
Build a strong emergency fund that can never be touched unless there is an emergency.
Smart business owners like to plan their expenses and finances right from the start. They don’t shy away from investing in the right tools that help them track all expenses instead of spreading bills all across tables.
You can be one of them too and maintain your accounting and financing activities with the help of automation. How is that possible? With Volopay. Volopay is an expense management tool that helps businesses make payments and do much more.
First of all, you can make all your business payments in one place and track them right there. By assigning approvers and custom workflows, you can redirect expenses in auto-pilot mode.
It also comes with corporate credit cards in physical and virtual formats. You can use them to take care of your one-time and recurring online payments, including employee expenses (Or use Volopay’s reimbursement tool for it).
No more manual reference and transfer of data as Volopay integrates with most of the ERPs. Take the stress out of timely invoice payments and centralized expense management with an intuitive dashboard like Volopay.