The U.S. Small Business Administration reports that almost 50 percent of small businesses close within the first five years. Many optimistic entrepreneurs end up underestimating the costs associated with starting and running a business. They accumulate overpowering debts or they end up with bad personal credit and even bankruptcy. As per business gurus, starting a business is all about determining the right budget and maintaining consistently a healthy and robust bottom line to allow your small business to grow and prosper and achieve new heights.
As per https://www.entrepreneur.com, more often than not, small businesses end up making a host of blunders that allow all their hard-earned and well-deserved money to gradually leak away. For instance, 21% of owners of small businesses admit that they claim less than 50 percent of all their business expenses and that implies that they are drastically overpaying their taxes. A big reason behind this is the typical habit of not claiming small figures but that is certainly a mistake. Small business owners must get into the habit of keeping all the receipts because even 5 dollar claims eventually add up and things get out of control.
Currently, we are witnessing a steady rise in the overall number of startups and small businesses. Unfortunately, many of them would not succeed financially. Business owners must avoid the following business finance mistakes to make sure that their businesses are growing and flourishing with time.
Mistake: Not Understanding the Difference between Cash Flow and Profit
Accounting is the fundamental language of business and it is of critical importance for entrepreneurs to understand the basics. Most businesses are in the habit of using the accrual accounting form where expenses and revenues are recorded once they are incurred, instead of recording them once they are paid. Hence, businesses often struggle to pay off their outstanding bills. If small business owners devote some time to understand accounting basics, they could easily master the skill and guide their business smoothly towards success.
Mistake: Committing To Unnecessary High Fixed Costs
Fixed costs are supposed to be expenses such as salaries, office rent, and even mortgage payments that are supposed to be incurred each and every month without fail regardless of whether you are getting conversions or not. Every fixed cost, therefore, must be justified. Small businesses and startups must devote some time in figuring out if the rent going towards such a plush office in a posh location at all makes any sense. Today, many organizations are employing the services of remote workers for reducing office expenses and travel time. Small businesses must focus on keeping their fixed costs low initially. Moreover, it is of critical importance to evaluate the return on investment (ROI) of each and every employee. In this context, you must keep in mind that a small but efficient team would prove to be more effective as compared to a big overrated team.
Mistake: Not Creating a Budget
A big business finance flaw would be to run a business without an appropriate budget. A key responsibility of a CEO is effective capital allocation. We understand that budgeting is certainly a crucial skill. However, every business owner must focus on chalking out a proper budget. You must remember that projecting precisely where all your money would be spent every month could go a long way in assisting business owners in avoiding nerve-racking fire-fighting issues.
The most difficult part of running a business is staying disciplined. Often there would be expenditures that just cannot be accommodated in your budget. You simply have to let go without falling to temptations and concentrate on important expenses. Budgeting is crucial to business success.
When you have a pre-determined budget, you can manage your finances accurately and spend efficiently. Without a proper budget, you may end up forgetting about future tax obligations, insurance payments, and some other essential expenses. You may even go on spending substantial amounts of money even when the sales are dipping. If you do not have a proper budget, you would be compelled to take loans to run your business and you would start accumulating credit card debt. You must chalk out a perfect budget for your business and have precise financial management objectives for the future.
Mistake: Not Maintaining Separate Personal & Business Accounts
It is of utmost importance for entrepreneurs to ensure that their personal finances are separated from business accounts. Businesses must be regarded as separate entities and business finance must not be integrated with the personal finance of the business owner. This seems to be one of the greatest challenges associated with sole proprietorship.
It is of pivotal importance to never start using personal funds or accounts for business transactions and do not ever use business funds towards personal expenses. Failing to separate personal and business expenses could culminate in serious business cash flow problems and major monetary complications relating to measuring profits, balancing accounts, setting precise financial objectives, and filing taxes.
Mistake: Incurring Too Much Credit Card Debt
For small businesses, Chase Freedom credit cards are quite helpful in providing easy access to crucial revolving line-of-credit for making purchases and withdrawing cash. They come with a set or fixed credit limit and would be charging an interest provided the balance has not been repaid every billing cycle. Using credit cards for business purposes is a pretty common practice, as far as businesses go. However, you must not go overboard and it is important not to be reckless in handling business credit cards.
You must enjoy the convenience of business credit cards but use them with caution and discretion. You must act responsibly while handling credit cards. Be sure to manage all your credit card payments consistently and promptly. Otherwise, you would be grappling with too much credit card debt. You must stick to paying off your full balance every month.
Credit cards are most convenient but they do not seem to be the right choice for large business expenditures because you won’t be able to pay in full on time before interest is supposed to kick in. Moreover, it is quite possible that a few large purchases could max out your business credit card, leaving you with no source of funds. Moreover, excessive credit card debt could prove to be stressful. So entrepreneurs must use business credit cards wisely to reap their benefits but at the same time, stay away from accumulating excessive credit card debts.
It is quite natural for business owners to make certain financial blunders and in turn, learn certain hard lessons. However, it is critical to know the common business finance mistakes discussed above so that you never make such mistakes and march well ahead of the others in your quest for success!