The great thing about business is that there seems to be a market for everything. In America, we have seen a tremendous amount of creative and unique businesses come about in the last decade. From pop-up shops to food trucks, businesses are continuing to thrive in the market, and many entrepreneurs are taking advantage of the momentum.
More banking institutions are offering people affordable options to open up their businesses, too. The effects of the recession have mostly passed, and more consumers are generating demand in the business market. As more of these opportunities become available, it becomes evident that business owners need proper training and experience in financial literacy.
You’re now living the dream. You’ve found the means to open up a business and get the chance to be your own boss. Owning your business has a lot of great benefits, and can be very lucrative as long as you sustain good business practices.
There is, however, the potential for a business to fail simply because of poor financial management and advisement. This scenario is particularly the case if the business owner doesn’t have an accounting background - he or she can be in for a rude awakening when it comes to checking off balances and paying for expenses.
Although enlisting the help of a financial advisor or accountant would be a good idea, you don’t have to hold a certificate in accounting to own your business. Will it help? Of course. But, it’s not necessary.
A business’s financial health depends on the owner having the right resources, mindset, and motivation. It can be easy to fall into a financial trap that can also lead to the business’s failure. Be sure to follow specific practices that will keep your business afloat for years to come.
Try to avoid these four most common financial mistakes that people make that end up costing them everything.
1. Habitual Late Payments
Now that you own a business, you have to protect your credit even more closely than you did as an individual. You’ll most likely be opening up several accounts and having to pay for many different expenses that you typically would not do in your personal life.
Staying on top of making payments will help you keep your credit in line and avoid late payments. It would be a good idea to set yourself up for automated payments each month so that way you don’t have to worry about manually paying bills on time.
One late payment can be detrimental to your credit score and limit your possibilities for more credit within your business. If you’re attempting to get a business credit card, but a low score from a late payment shows up on your report, you can risk being denied the application.
Another habit that you don’t want to get into is allowing customers to pay their bills late. You may think that you’re doing them a favor and making them feel like they can trust you as a business owner, but the fact of the matter is you need to pay your bills. You can’t pay your bills if your customers don’t pay theirs.
There are great services available for businesses that help them with balancing their checkbooks such as Quickbooks, Inc., which is one of the most popular ones that companies use. The software helps companies create invoices and notifies them when there are outstanding balances.
2. Not Having a Separation Between Business and Pleasure
Another mistake that failed business owners tend to make is combining business and personal expenses. This mistake is one of the most common ones made by business owners. Putting all your personal money into a business can complicate a lot of things down the road such as annual tax payments and figuring out profit and losses.
This mistake is prevalent in a lot of family businesses. Families will devote themselves and their finances to the business and sometimes, there are a lot of complications associated with not only the logistics of the business but the personal relationships between family members in general.
For instance, the sister of the family may have put all of her savings into the investment and years after its decline, she wants to pull her share out, but the business is deep in the red. She can’t be paid back because there are no funds to repay her. This can cause a rift in the business relationship - and the personal relationship, too.
Family businesses can be quite successful as long as there are solid practices in place and families separate their personal finances from that of the business. They may thrive even more with the help of a financial advisor who specializes in servicing family businesses.
A good way to avoid combining these two expenses is to open a business account with your bank. You can sign up for a checking and a savings account that are strictly for your business. You can also sign up for a credit card that you designate for business purchases.
Sometimes, banks will have promotions and percentage rewards for business owners who open up specific business cards. This will be a nice bonus for you to put away for savings since you’ll need to make those purchases for the business anyway. Having all of this separate helps you to track expenses and balance checkbooks for just the business.
3. Not Getting Into the Habit of Saving
Just as you would with your personal savings, your business should have its own personal savings account. This should be considered the rainy-day fund. In business, sometimes the market is unpredictable, and there are unforeseen circumstances that require you to make big purchases for your business.
Unexpected expenses happen often. You might experience the entire air conditioning system going out, or you might have to pay for an insurance claim when one of your employees gets hurt on the job. Property taxes could increase in a moment’s notice and change your budget by hundreds or thousands of dollars. These can be costly fixes and you might not have the money to pay for them.
These are not anticipated expenses, and when you dip into your budget for them, they can set you back more than you had hoped. Planning is always a good idea so you can be prepared for these unforeseen circumstances. If you have an emergency fund, it can greatly alleviate your stress and reduce the need to resort to cutting into your personal savings.
A good way to start saving for the business is by allotting about 10% of your revenue each month and putting it away, just as you would with personal savings. You can also do something with extra unanticipated revenue and consider putting that into a savings account. Make sure the savings account also accrues interest.
Getting into the habit of setting money aside will also help you remain frugal when it comes to running your business. You don’t want to overspend on unnecessary things and can feel comfortable knowing that you have some emergency money to access when you need to.
You should also set up automatic transfers or contributions to this savings account. You can have the system automatically deposit any amount of your choice each month so that way you can save without having to do anything.
4. Wasting Time and Money
In the business world, time is money. If either one is wasted, then it affects the other. You’ll learn quickly that certain things you spend your money or time on will be more valuable than others. It may be tempting for a lot of business owners to want to try everything and take every meeting, but over time, you’ll see which ones benefit your business and which are truly taking up too much of your time.
Perhaps you’re unsure where your money is going and where it’s getting wasted. You can take a look at a helpful checklist below that works to identify critical financial issues in a business. Usually, businesses will have at least 2-3 areas of focus that keep them most productive.
If you stick to the 80/20 rule, you can focus 80% of your time on things that are valuable to your business and leave the other 20% for things that are still beneficial to your business, but not as important as the other 80%.
Yes, owning a business can bring on a lot of stress. On top of customer satisfaction, employee retention, and meeting the demands of the consumer market, business owners have to become very knowledgeable in financial literacy to keep their businesses alive.
Business models can be the greatest idea in the world, but poor financial planning can make that business see a quick decline and potential failure. However, the benefits of business ownership can greatly outweigh these stresses. Depending on your product or service, you have the potential to make a lot of money that can set you up for the rest of your life.
As you become more experienced and guided with a credible financial advisor, you’ll be able to avoid making these costly mistakes and keep your business running for the long haul.