7 Common Small Business Money Mistakes

Staying on top of your business’s finances is just as important as finding new customers and serving existing ones. But, if you’re like most small business owners, bookkeeping and managing money is probably not your strong suit. You can stay ahead of the game if you avoid making these seven common small business money mistakes.

Of all the roles a small business owner takes on, often the most challenging is managing the business’s finances. The reasons are many, but most small business owners don’t have a background in business finance, and at least at the start, are more focused on bringing in business and serving the customers than they are on record keeping and financial planning for their business. As a result, many work long and hard at their businesses with only mediocre success to show for their efforts. Others fail completely.

You can improve your chances for success — and your profitability — by being aware of and steering clear of these common small business money mistakes.

Insufficient Cash

Insufficient cash is one of the leading causes of business failure. Startups often overestimate how quickly they’ll start making money, and underestimate all the expenses they’ll incur. But startups aren’t the only businesses prone to failure due to insufficient cash. Once you have a steady flow of business, you can run into cash problems in a couple of ways. One is a failure to realize the difference between cash flow and sales. You can have plenty of sales on record, but unless you get paid in advance for those sales, you’ll have expenses to pay before you collect from your customers. If some of your big customers pay late or don’t pay at all, you may not have the cash to pay your bills on time.

Growing businesses can have a similar problem. You ramp up to be able to serve bigger customers or a wider area, and before you start earning income from the growth, you need cash to pay your growing staff, growing payroll taxes, and other growing overhead expenses.

Still another problem for an existing business: existing cash flow may make the business owner miss or ignore falling profits and growing debt. To avoid cash flow problems take time to accurately estimate all your costs and allow for the time it can take you to get paid. Get invoices out on time, stay on top of collectibles, and reassess your cash position at least quarterly, if not more often.

If the invoicing part of that is a struggle for you, the ZenBusiness Money app makes it fast and simple for small business owners to get paid. You can use it to easily send custom invoices, accept credit card and bank transfer payments, and manage your clients.

Failing to Create a Budget, or Stick to One

A budget is a tool that lets you look at income and expenses for a set period of time (month, quarter, year) so you can manage your finances — and your spending — accordingly. If you don’t have a budget, or you don’t pay attention to the one you created, you may forget about future tax obligations, insurance payments, or other occasional (but costly) expenses. Or, maybe you’ll tie up cash by making a large purchase during a time that sales are normally slow in your business. In either case, if you wind up needing a loan or running up credit card debt, you’ll be adding interest expense to your costs of doing business.   

Related: How to Create a Small Business Budget

Waiting Too Long to Seek Credit

The worst time to look for a business loan or line of credit is when you most need it. If your business is paying its bills late and is on the brink of failing, finding funding will be difficult or impossible. The time to seek funding is when your business looks solid enough to convince a lender you will be able to repay what you borrow. 

The type of credit to seek will depend on the type of business you run, the purpose of the funds, and the size of the loan. Depending on what you need, funding sources include traditional banks, online lenders, credit card cash advances or purchases, and specialty lenders. (For major projects, check with your local economic development agencies for suggestions on funding.) Interest rates and terms vary widely, so give yourself time to find the best funding source for your needs. And don’t get discouraged if local banks turn you down. Check with the major online lenders to see if they’ll work with you and how their rates and terms may compare with other options.

Overspending on Startup Costs

When you’re starting out, it’s natural to be optimistic about how much business you’ll do and how fast you’ll start bringing in that business. And, you want to be sure you’ll have everything in place to meet customers’ needs. Unfortunately, that optimism can lead to overspending. Unless you’ve carefully researched your needs (and budgeted for them), you can wind up ordering more inventory than you’ll be able to use in a reasonable amount of time, hiring staff before you need to, buying new equipment before the business can support it, and spending too much on marketing before you know what marketing methods produce the best return on investment (ROI).

To avoid overspending on startup costs, create a realistic startup budget for your business. Base the budget on facts. How did other businesses like yours get started? Did they start from home? How long did it take them to become profitable? How much inventory did they need, and how fast does it turn over? When did they hire employees? Where do they advertise? What equipment and software are essential to buy, and what can be put off until the business can pay for it? An accountant who works with small businesses or the local SCORE chapter or Small Business Development Center may be able to help you come up with some of these figures.

Related: Startup Cost Calculator

Mixing Business and Personal Funds

Whether you’re starting a new business or running an established business, mixing personal and business funds is a recipe for disaster. Assuming you’re the sole owner and you buy business supplies with your personal credit card or use a business check to pay for a personal purchase, you’re going to have difficulty keeping track of how much money the business actually is making or losing throughout the year.

You’ll also have a big headache at tax time trying to separate out the business and personal purchases to determine what’s deductible on your business tax form, and what your profit or loss is for the year. The headache will get a lot worse if you get audited and the IRS believes you have purchased goods or services for personal use and deducted them as business expenses. If you have business partners or investors and mix business and personal expenditures, you’ll have even more problems on your hands.

Finally, if you don’t clearly separate business and personal expenses (using separate banking accounts and credit cards for each), you’ll find it difficult or impossible to get a business loan if you ever need one.

Even if your business is only a part-time operation with few profits, you should have a separate checking account and separate credit card for the business. You may need to take out the credit card in your own name when you’re starting out, and that’s ok, as long as it’s used exclusively for business purchases.

If there are times when you have to use personal funds for your business — or vice versa — the correct way to handle the situation is to make a formal transaction and document it. If you have business partners, get them to sign off on the transaction, too.

Not Staying on Top of Record Keeping

Let’s face it. Record keeping is a big pain. As a business owner, your focus is usually on winning business and making sure the customers get your goods or services in a timely fashion. Along the way there are so many things to do that it’s easy to let record keeping fall by the wayside. Receipts for inventory or other purchases get shoved in a folder, envelope, drawer, or the proverbial shoebox, until such time as you “get around” to recording them. Invoices for items you’ve purchased on credit maybe wind up in your inbox — with dozens of other pieces of paper. Mileage records for business travel may wind up on the back of a receipt or napkin, or stuck in a note on your smartphone. Check stubs (from people who still pay you that way) wind up in the same folder or drawer, and credit card payments show up in your bank account based on the credit card used to make the purchase, with no convenient way of matching any one day’s credit card receipts to specific purchases made.

As a result, whenever you get around to actually putting the expenses and income records in an accounting program or spreadsheet, you’ll waste a lot of time trying to remember what each thing was for. You may also have misplaced some of the records. Worse, if you haven’t been keeping all your accounting up to date, you may find out months down the road that you’re losing money because the cost of your supplies increased and the number of hours your employees worked went up, but you never raised your prices.

The only way to avoid these kinds of record-keeping disasters is to do your record keeping weekly or more frequently. Either you have to take the time yourself to enter all the data into an accounting program or spreadsheet or you need to delegate the job to someone else. If you have someone else manage all your financial records, you need to review their work weekly, looking to be sure income and expenditures are properly documented and be sure that nothing looks strange. Employee theft is a big problem for small businesses, and often the thief turns out to be a trusted, long-time employee.

Under Pricing

Determining the right price to charge for products or services is seldom an easy decision. Charge too much, and you could lose sales to a competitor. Charge too little, and you won’t make much profit — or worse, you’ll lose money.

Small businesses — particularly those just starting out — often charge too little. Sometimes they rationalize that the low price is a way of “getting their foot in the door.” Sometimes the price is low because a new business owner isn’t taking into account the cost of his or her own labor, or hasn’t accurately determined all of the costs that have to be considered in setting prices.

A fencing company, for instance, has to figure in not only their costs for the fencing, but also the costs of labor, advertising, office expense, vehicle maintenance and repair, and other overhead costs when deciding what to charge customers. An independent consultant may have fewer overhead or labor costs to consider, but has to pay close attention to what their target annual income is, how many clients they’ll actually land and be able to serve during the year, and how many hours of work time will be billable vs. unbillable and what her advertising, networking, and other promotional expenses will be.

Established small businesses sometimes underprice their goods and services because they’re afraid to raise their rates. They worry that if they increase their prices, their customers will go elsewhere.

If you’re just starting out, remember to account for all your costs in figuring out what to charge, and check to see what competitors are charging for what you sell. Don’t try to be the lowest-priced vendor out there. Once you’re up and running, reassess your pricing structure at least annually. And whether you’re just starting out or have been in business for a while, take a few minutes to read some of the information we have available here on pricing strategies for small businesses.

Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

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