Many small business owners go into business for themselves because they’re good at what they do, be it building houses, cooking food, or crunching numbers.
But over the years, many of these small business owners fall prey to avoidable problems that drag their business down, because while they intimately understand their own trade/profession, they’ve never been trained on how to deal with the financial demands of a business.
As a result, nearly half of small businesses fail within five years. Many of these business owners made some crucial mistakes in those first few years of business – mistakes that could be avoided.
Mistake #1: Lack of a rainy day fund
Emergencies happen to businesses, big and small, new and old, and the only surefire way to navigate through client-droughts or sudden emergencies is to have enough extra cash on hand to float through without having to rely on credit cards or loans.
With emergency funds in place, you can ride out those inevitable bumps in starting a business, until your business becomes more sustainable. Even then, a well-funded rainy day reserve will help you survive when your competitors are dropping.
Keep a personal rainy day fund, too
This mistake holds true in a small business owner’s personal life. Without the personal finances needed to make it through lean periods, business owners unable to fund their lifestyles will often choose to search for a new job, shuttering their business in the process.
A good rule of thumb for these emergency funds is to keep at least three months worth of expenses in your rainy day fund – both business and personal.
Mistake #2: Not sticking to a budget
There are a lot of costs in starting up a business, and price tags can quickly inflate. From new laptops to new offices, getting the fanciest gear may help you find clients, but all those benefits will disappear if you don’t have the cash flow to keep your business open.
As the manager for your business, ensuring your business stays in the black is up to you.
While it is important to grow, you can't always rely on making more money to cover new expenses. By planning your expenditures wisely, you can reduce the likelihood of spiralling into debt that could sink your business.
Plan your budget wisely
Start your budget by designating the purchases that are most likely to offer a return on their investment, such as educational, practical and lead-generating tools, and build your budget around those numbers. Then, when the business is bringing in more money, and there’s room in the budget, you can invest in those new computers.
Once again, this is equally important for your personal finances. Big purchases, like new cars or houses, can cause extra drag on your finances when you are trying to maintain your focus on investing in your business. That extra drag can bring you, and your business, down. Stay as lean as you can through those first few years, and you’ll increase the chances of your business’s survival.
Mistake #3: Relying too heavily on credit
Credit always seems like a boon in the moment – you need money and it’s suddenly there, keeping all the gears lubricated and everything running smoothly. But spending money now, in the hopes that the investment will pay back, can easily backfire. Every dollar spent on credit cards, or taken from lines of credit or loans, incur interest, and if that money isn’t paid back on time and in full, you’re risking creating a money-sinking feedback loop.
Use credit wisely
The best use of credit is well-planned out so that debts are paid back in full and on time, and the interest you pay is balanced with a good ROI. Otherwise, you’ll find yourself spending money that should be used for the business to maintain an ever-growing debt.
Mistake #4: Lack of tax planning
Nobody likes taxes, but if you ignore your tax burden until the government asks for it, you’re flirting with disaster.
Throughout the year, you should always have an idea of approximately how much you are going to owe on your taxes, both sales tax and income tax. That dollar amount should be saved in a specific tax account that you do not touch until you are ready to do your taxes.
Stay organized and set aside tax money
Scrambling to scrounge up the money to pay your taxes when you get that notice of assessment is very stressful. But, if you are organized and set aside the proper amount of tax money, you can sidestep the hassle, and possibly even find yourself with a little extra cash for your rainy day fund at the end of the year.
Mistake # 5: Combine personal and business accounts
It’s easy to allow your business and yourself to become financially entangled. The problem is that when your personal finances and your business finances are the same, it becomes an accounting nightmare which keeps you from truly understanding how well your business is doing.
Keep yourself and your business separate
From making sure your taxes are in order, to keeping your accounts receivables straight, maintaining yourself and your business as two separate entities will help make everything clearer, and make managing the numbers much easier. You’ll also know when your business is making money, and whether you're investing enough in your business.
Success is in the details
Most small business owners are too focused on the big picture – on carving out a successful business through the number of clients they have or how much money they’re making.
But, the truth is, the best steps a small business can take lie in the smaller details – on being smart in the smaller, financial details of their business.
Focus on the smaller details first
Details like proper tax planning and budgeting seem so simple that they are often discounted. But, by properly managing the smaller details, you can avoid simple mistakes (like those listed above) and your business will have a better chance to succeed. You’ll be more equipped to deal with those inevitable financial costs that pop up when running a business – big or small, and you’ll have a solid foundation for your business to stand on.