6 Financial Mistakes That Can Kill Your Business
December 1, 2020 | Joyce Ibrahim
There’s no template for success, and that’s especially true for entrepreneurs and small business owners. Starting and running a small business is a learning experience above all else, and entrepreneurs usually have a tendency to test their limits and a drive to conquer uncharted territory. But it’s that same appetite for risk and novelty that can often push company leaders into making mistakes. Although mistakes are inevitable and even necessary for growth, some can be deadly for a business, especially those related to money.
Here are the top 6 financial mistakes you need to avoid if you want your business to stay solvent and succeed.
- Not separating personal and business accounts
You may think that since your business is still small, there’s no immediate need to open a separate company account when you can just use your own. But your earnings and expenses will keep growing, and falling into the trap of convenience is exactly what will lead you into detrimental cash flow issues.
Creating separate savings, checking, and credit card accounts for your business from the beginning will help you facilitate accounting, plan ahead for taxes, and budget for unpredictable times. Furthermore, it’s difficult to get a clear picture on your company’s financial health when your personal earnings and spending and those of business overlap.
- Spending too much too soon
Don’t let the excitement of starting a business translate into impulse purchases. Obviously, you would love to see your company set up with the latest laptops and trendiest office space. But in early stages, it’s critical that you differentiate between purchases and investments. Remember that building a business is a long-term process, and capital is its fuel. Instead of spending on items that are “nice to have” or that could be useful someday, make do with the bare minimum and only spend in areas that will help you generate more revenue. Your business will grow and you’ll have more disposable cash to spend on expanding it further.
- Seeking financing at the wrong time
Waiting until your small business is facing an emergency to seek funding is a recipe for disaster. Applying for a small business loan takes time and a lot of back and forth, which you can’t afford when there’s are urgent measures you need to take to steer your company into safety.
Another financing mistake many entrepreneurs make is borrowing money they don’t really need. The more successful a business, the easier it is for it to receive financing, but this also comes at a price. Business financing implies fees, costs, and interests with each loan you take out, and unless it’s absolutely necessary for the survival of your company, debt is something you need to avoid.
- Accumulating credit card debt
While using a business credit card is common business practice, using it irresponsibly is one of the worst financial mistakes entrepreneurs can make. Credit cards offer such a high level of convenience that makes it easy for business owners to fall into mismanagement. Compounding expenses and interest charges with every use of your credit line, and failing to pay off the full balance each month is a major cause of cash flow issues.
- Counting on only one major source of income
Although it’s critical to focus on improving your main offering early on, counting on a single source of income in the long run could make you more vulnerable to the unexpected. According to Brian Hamilton, co-founder of Sageworks, it’s important to treat your company’s revenue like a portfolio. As major revenue streams tend to die off over time, wisely diversifying your business income streams can protect you against changing markets while building your overall business.
- Not building a safety net
When it comes to building a financial safety net, it is as important in business as it is in your daily life. Regardless of how much you plan ahead, you will always encounter unanticipated expenses and events, and covering the cost with your credit card is only going to add to your cash problems down the line.
Need help evaluating your company’s financial health? Get in touch with Brakket Invest to find out what we can do for you!