9 Financial Mistakes Entrepreneurs Make (And How to Avoid Them)
Successful business people take risks, lots and lots of them. Some of these risks don’t turn out as planned and can lead to self-doubt and aversion to risk.
There are some financial risks you shouldn’t be taking because they’re usually proven ways to run a business aground. At this point, you shouldn’t call them risks anymore because they are very clear mistakes.
Here are nine business finance mistakes you should avoid at all costs:
1. Running The Business With Your Personal Account
This is one very clear mistake many are guilty of — especially for new businesses. It doesn’t matter if you’re a freelancer or consultant or if you have one client or ten.
One of the first things you should do is set up a separate banking account.
Having a separate account will help you with your taxes and you can plan for your business without it conflicting with your personal plans.
When things are combined, there’s no way to know if you’re making a profit and where there are areas of concern.
2. Spending It All On Purchases
I should say ‘unnecessary’ purchases.
Instead, I would argue the expense for any business should be evaluated based on improved productivity.
If you get something when there’s a cheaper alternative, especially for recurring costs, you could be hurting your finances. Many recurring services offer a free-trial and/or a free option with limited features.
9 times out of 10, the free option will be sufficient for a new business.
But it’s okay to spend if the money you can be earning from the tool makes up for the expenses on the service.
So there are mandatory expenses, a professional freelancer can’t do without a website that displays his portfolio. Think before spending and you’ll discover there are many things you don’t need to spend on.
3. Making Purchases On Cashflow Potential
So you’ve sent out a hundred pitches, about ten have replied and you should be expecting a lot of money in a coming month.
That’s good but what if it doesn’t happen?
What if some of those prospects change their minds and move on with someone else?
The only money you should be spending and making plans with is the one sitting in your account. To avoid making this mistake, try to always look at both sides of the coin and plan based on reality rather than hypotheticals.
4. Save For The Rainy Day
This may be more of a personal idiom, but look at the numbers for those that’ll be in debt without a month’s pay and you’ll see that very few people take that advice.
And the rainy day doesn’t mean you’ll only need emergency fund for a single day. The rainy day in your business can be your first week or your first month or the first five years of your business.
In that time, you’ll need money to keep it going.
Tools, subscriptions, and certifications don’t pay for themselves. So don’t put yourself in a position where you’d be left hanging without the spare cash.
5. Not Planning For Upcoming Tax Obligations
2018 brought about numerous tax changes for small business owners.
Unless you live in a tax-free country, you’ll pay a certain percentage of your income as tax to the government monthly, quarterly or yearly, depending on the tax rules where you live.
Speak with an accountant before deciding on the amount and cadence of estimated tax payments that are appropriate for your business.
You could end up paying a higher percentage than others in the same industry if you don’t invest in learning the tax rules that can benefit your business.
Remember tax evasion is a crime, but there’s nothing wrong with tax avoidance. With tax avoidance, you’re using the laws to reduce the amount of taxes you’ll have to pay.
6. Running A Business Without A Budget
There are few mistakes you can make in your business that are greater than unplanned spending. A budget gives you room to plan for profitability and for the rainy day.
Spending outside the budget is illegal in many constitutional democracies because it encourages reckless spending. That’s the same attitude you should have in your business.
Budgeting is the best way to control your spending.
7. Forgetting About The Hidden Costs
Yep, the coffee at break time, snacks during meetings, calls made to employees working overseas.
Those costs do add up but also contribute to building a culture and improved employee morale. As a result, they can be a worthwhile expense but, even so, you shouldn’t forget about these hidden costs.
Try to make most or even all of these types of purchases with a credit card which will help tremendously in accounting for these ‘hidden’ small fees each month.
Evaluate these monthly reports for any unnecessary purchases that are beginning to take a significant portion of your expenses. Work on cutting those purchases and that’s how you can handle the situation.
8. Spending Too Much On Marketing Campaigns
There’s nothing wrong with spending to get the word out there about your company.
There are marketing companies that can help with that. But remember, great marketing can only bring people to your business, the initial conversion and repeated sales depend on how good your services are.
Good marketing can give you new clients/customers, but if you deliver a poor experience, there is a risk of negative reviews and customers looking for a refund.
So for a business that’s still trying to find its place in the market, try to spend on things that’ll improve your services.
9. Outsourcing All of Your Financial Management
Don’t completely outsource finance management.
Plain and simple.
You can have someone generating reports and managing to invoice but you should have a clear understanding of the financial health of your business.
More importantly, you should know the profitability of each customer and/or product. It will lead to success or failure.
I’m sure there are more, but avoiding these nine common financial mistakes will lead to a much more profitable and long-standing business.