Starting a business is one of the most and fulfilling accomplishments that you can experience in life. Unfortunately, many business owners aren’t prepared to manage their finances properly. In fact, these financial mistakes are one of the main causes why a company fails.
If you’re aware of these mistakes in advance, then you can take the appropriate steps to ensure that your business will succeed. Even the most skilled of business owners will overlook a few of these.
Here are twelve financial mistakes that your company is most likely guilty of making right now.
1. Not staying on top of your bookkeeping.
Accounting isn’t the most exciting task. And, besides, there are more important projects to focus on, like marketing your product. The thing is, failing to stay on top of basic accounting and bookkeeping chores, such as reconciling business checking statements, credit card statements, sales tax accounts, and following up on unpaid invoices, can lead to cash flow problems, bad credit ratings, and the inability to make sound business decisions.
As Dave Ramsey says, “I don’t care how much you hate diving into the numbers, business owners who don’t stay on top of their accounting fail and close up shop.”
Make sure that make this a priority by setting aside at least one day per week to complete financial statements.
2. Adding fixed costs.
In our personal lives we’re all guilty of splurging every now and then. Whether if it’s going out to an expensive restaurant, purchasing a new outfit, or paying for the full-cable TV package, these optional expenses probably don’t set us back too much financially.
For business owners, however, adding on these fixed costs, such as a big office, new equipment, or hiring a wave of new employees, can be devastating. While brand new tablets or Ergonomic office chairs for everyone on your team sounds great on top, they’re not a necessity.
If it’s not essential, then say ‘no’ to adding these fixed costs. And, if you really believe you need something, such as an office or equipment, consider renting it. You’ll still get what that shiny toy, without having to make an expensive investment for it.
3. Not factoring hidden costs.
Sometimes business owners are so focused on the expenses that they’ve taken into account when creating their budgets that they overlook those sneaky hidden expenses. These could include;
- Employee turnover.
- Payroll taxes and benefits.
- Licenses, permits, and insurance plans.
- Inventory reduction due to damage, theft, or administrative errors.
- Bank or credit card fees.
- Payment delays.
- Professional services, such as attorneys, accountants, or cleaning.
- Repairing or upgrading your office or equipment.
4. Lack of planning.
Launching your own business takes a lot of planning, But sometimes when you’re busy tinkering with your product or service or conducting market research you neglect vital financial preparations like;
- Acquiring too much debt because you accept every loan or credit card card offer. Accept just what you need to get started.
- Not raising enough money.
- Preparing for cash-flow fluctuations.
- Miscalculating the over/under by creating annual budgets – stick with quarterly budgets until you know your business.
- Raising too much money before you’ve identified a profitable market.
- Spending too marketing, such as PPC campaigns.
5. Failing to properly learn accounting software.
Accounting software has become a real life-saver for business owners. Take for example invoicing software that allows you to quickly create personalized invoices and set-up recurring invoices. There’s also software that handles payroll, taxes, and even monitors your budget.
Unfortunately, business owners don’t take the time to learn how to properly use these tools. This means that they can make mistakes or not tap into the full-potential of the software – which means they’re ultimately wasting time and money.
Get your hands dirty and play around with this software, sign-up for a class, or view instructional materials.
6. Incorrectly classifying employees.
Do you know the difference between a contractor and employee? If not, you could be making a costly mistake since you’ll be not only be required to back wages and penalties, but also because you’ll be spending money on a full-time employee that you don’t exactly need.
Generally, contractors are outsourced employees, such as a freelancers. They work independently and set their own hours. Because of this, you don’t have to be concerned about taxes or benefits.
With employees, you are responsible for withholding taxes and providing them benefits since they work directly for you.
Brush on these differences between these types of employees and understand the pros and cons of each depending on the needs of your business, as well as how much you have allocated in your budget for employees.
7. Not setting aside money for taxes.
Don’t ever mess with the IRS. It’s one of the worst decisions that you’ll ever make. To prevent any hiccups with the IRS, make sure that you set aside at least 25% of your profits to pay your quarterly IRS estimates into a monthly tax-savings account. And, the same is true for your payroll and sales taxes.
8. Commingling personal and company assets.
This may not seem like a big deal initially, but separating your personal and company assets will avoid some major headaches down the road. For example, using your company card to pay for personal items, like a new TV or vacation, and then you trying to claim those as business expenses when tax season comes around can land you in hot water. And, as I previously mentioned, you don’t want to mess with the IRS.
Furthermore, it makes bookkeeping less complicated since you don’t have to be worried about mixing up those personal and company expenses.
The easiest ways to keep these accounts separated is by having separate bank accounts and lines of credit.
9. Sales mismanagement.
Correctly managing a company’s margins will ensure that it will continue to grow. However, many companies fail to do this. Ultimately, this mismanagement of sales can have serious consequences for your business.
To stay on the right track, make sure that you don’t:
- Set your prices too low in order to compete. While you want to stay competitive, having higher prices will protect your margins and increase profits.
- Depending on just one revenue stream. Having multiple streams of income will provide cash flow, and even attract new customers, when one source of income becomes less dependable.
- Let sales do what they want. Instead you should have a standard procedure for every aspect of your sales process.
10. Throwing away receipts.
Despite living in an increasingly digitized world, receipts still need to be retained so that you track your company’s spending, keep tabs on tax deductions, and be used to verify expenses if you’re audited by the IRS.
Thanks to tools like Neat, you can easily scan business receipts so that they’re organized and accessible whenever you need them. Besides keeping your receipts in one convenient location, you can also use these scanned receipts to create reports since it integrates this information with your accounting software.
11. Hiring the wrong individual.
While it’s important to watch your spending, you definitely don’t want to skimp when it comes to hiring the right person to handle your accounting and finances. A professional accountant has the knowledge and experience to properly classify expenses, is up-to-date on the latest tax laws, and can correctly manage finance statements.
Someone without this knowledge can make errors that result in everything from penalties, misinterpreting facts about assets, making bad-faith estimates, and using the wrong type of accounting methods, bad-faith estimates.
12. Relying on someone or technology to monitor your finances.
Even though you should pay the money for an accountant and accounting software, you can’t afford to be completely hands-off when it comes to your company’s finances. As the owner of the company, it’s your responsibility to carefully review your financial reports so that you have a clear understanding of the financial state of your business.
And, if numbers aren’t your thing, then ask your financial advisor or accountant to provide you with an easy-to-understand report that explain information like how much money you have in your bank account, your unpaid invoices, projected revenue, and a cash flow projection for the next several months.
Accounting software generally provide reports or graphs that share this information. But, they’re useless if you’re not devoting the time in reviewing the data.