Managing finances and cash flow is an essential part of any small business. However, it is often a pain point because, unlike large corporations, small businesses may not have full-time bookkeepers, accountants or finance experts on hand. For this reason, small businesses can find themselves in trouble when making some of the money mistakes outlined below.
Keep reading to learn more about the top 5 money mistakes small businesses make and what to do instead.
Money Mistake #1: Overspending
Frontloading expenses and making large purchases can be tempting, especially regarding things like new equipment and office furniture. While this can also be considered an investment for your business, overspending and making large purchases can be a huge money mistake.
What to do instead
Be as lean as possible when it comes to spending to keep costs under control. If you need to make a large purchase, which is undoubtedly inevitable, then it is a good idea to budget for that. It is also helpful to remind yourself to stick to the expenses that are critical to running your day-to-day operations.
Money Mistake #2: Mixing Personal and Business Banking
From day one, your business and personal finances should be completely separate. Never use your personal bank accounts or funds for business transactions or vice versa. Failing to make this distinct separation could lead to cash flow issues, challenges when filing taxes, and complications pertaining to financial goals and analytics.
What to do instead
Open a business bank account, credit card, and line of credit (if needed) to help you track expenses and manage your cash flow. If a business expense is incurred on a personal debit or credit card by accident, be sure to go through the proper channels to get reimbursed so that it does not impact your record-keeping or cash flow.
Money Mistake #3: Incurring Credit Card Debt
Having a business credit card is a common practice and comes with a lot of advantages, as it can help boost your business’s credit rating, improve cash flow and even provide rewards (e.g. points). However, a credit card only remains advantageous when it is managed properly. That means paying off the balance each month. Incurring credit card debt is a big money mistake that can really impact your credit score and become a liability.
What to do instead
Avoid using your credit card if you are not confident you can pay it off at the end of each month. If you need to make a purchase that you are unsure you can pay for, consider a line of credit to cover expenses.
Money Mistake #4: Not Maintaining a Cash Reserve or a Rainy Day Fund
A rainy day fund is a must for any small business owner. Even if you are not turning a profit, it is still important to build up a reserve. This will give your business a buffer to help you through tough times or grow when the time is right. It also gives you something to fall back on when unexpected expenses arise.
What to do instead
Open a savings account or dedicated account for your cash reserve. You can either determine a set amount each month to divert to that account or make a decision at the end of each month. It can be intimidating, especially if your business has yet to turn a profit, but remember to start small and budget for it. According to the experts, it is wise to have at least six months of operating expenses in your cash reserve.
Money Mistake #5: Taxes
Running a successful business requires a lot of planning and documentation, especially when it comes to tax time. Filing business taxes can be intimidating and overwhelming, as there is a lot to know (e.g. tax credits, payments).
What to do instead
Hiring a professional CPA accountant will make your life a lot easier. A CPA can set up accounting processes for your business and maximize your tax return. CPA’s are tax specialists who remain up to date on the latest information, related to credits and filings. They can help your business make quarterly payments to the IRS to avoid a huge tax bill at the end of the fiscal year and make strategic decisions for your business.
Avoiding these top money mistakes and being proactive will put your business on a path to success.
To learn more about how John Freeman CPA can help your business avoid money mistakes, contact us today.