4 Most Common Financial Mistakes Small Businesses Make
Small business owners have a lot of responsibilities. Among them is taking care of the financials.
Yet, there are some financial mistakes that entrepreneurs often make. You can avoid them by planning or using the right tools.
This is why we decided to point these four most common financial mistakes so that you can keep an eye on them. Let’s start!
Mixing your business and personal account
If you are a first-time entrepreneur, you may see it as normal to mix your personal and business accounts. This can be so confusing. But, it is a thing that you should definitely avoid. If you mix them then you may face some issues with cash flow management and tax. Also, pay attention not to use your business debit card for your personal expenses. The reason:
It usually has an effect on the taxes: If you are using your personal account for business expenses, the “tax man” will find it hard to determine if your business is a company or a hobby. So when audited, you may find your business at risk.
It also has an effect if taking a loan: When banks are considering your business’s loan, one major metric is your business’s cash flow and transaction history. Imagine you apply for a loan for your business and you submit your personal account statement for your transaction history (automatic F9!). You can build your transaction history if you keep your business and personal accounts separate. If you use your business account for personal use or vice versa then this will affect your loan eligibility for sure.
If you want to know more about how to prepare for an SME loan in Nigeria, read our article here.
Not tracking your finances
Managing your finances means tracking how much money you are getting and spending.
So, here we share our tool dillali that will help you manage your finances successfully. You can keep track of your business income and expenses and stay organized. Register here – dillali is Free.
It is also important not to rush in some things that may affect your finances such as:
Making large purchases: You may want to hold on with buying everything at the very start. Think of your potential return on investment (ROI). You will have better control of your cash flow if you avoid overspending your money. As the business grows, reinvest in your profit.
Making debt while expecting possible future revenue: This is very like the previous point. You may think it is smart to invest in inventory or marketing, but take it slow since you will expose your business to risk.
Not having emergency fund money: If you have set a specific amount of cash aside for emergencies, you will be able to protect your business from those unexpected expenses.
Changing tax guidelines
Time flies so fast and before you know it, it is the end of the year and you need to file taxes. This is where the advanced planning comes so that you avoid a surprise. Among the most common financial mistakes that occur to small business owners are underpaying estimated taxes, paying late, depositing employment taxes, and mixing business and personal expenses.
Planning for the taxes: There are some business sectors, where the owners may pay themselves as employees. But here there will be some extra taxes to pay, so it is good to know that in advance and plan your finances.
Federal and state tax obligations: Although the federal taxes are the same for all business entrepreneurs, the state tax obligations vary by state. So you need to be aware that the taxes change in a different location. Your taxes will depend on the type of business you are running.
If you don’t pay your taxes, you will face a penalty. Consult an expert in this field if necessary.
Not having business insurance
You can lower your financial risk by having business insurance. There are a lot of types to choose from. Depending on the type of your business, you first need to consult with an insurance provider. We will only mention some of the options here:
· Liability insurance (protection from injuries and damage to property or people)
· Product liability insurance (protection from a product or service that causes injury or damage to third parties)
· Professional liability insurance (protection against negligence claims related to a professional service)
· Commercial property insurance (protection on physical assets from fire, explosions, theft, etc.)
· Home-based business insurance (protection on business assets, including business personal property, often for self-employed professionals)
· Business owner’s policy (for small and medium businesses that combines property and liability coverage)
· Goods in transit insurance
We hope that these tips will help you with planning and avoiding costly mistakes. Even if something unexpected happens, you will have some room for expenses and still survive on the market.
Thanks and see you at the next one!