Small business owners get to choose the direction of their company, set their own hours, and enjoy freedoms and benefits. However, they also worry about dealing with debt, paying taxes, and overcoming financial setbacks. According to the Small Business Administration, 21.4% of businesses fail within their first year and more than half crash within five years.
Companies fail for various reasons. Some business owners simply do not realize that it takes a lot more work than they expect to achieve profitability. For many, though, financial mistakes may make success hard to reach. Budgeting or tax errors can lead to problems, and multiple mistakes cause bankruptcy and destroy the business, leading to temporary unemployment for the business owner and the people who work for them.
Here are the most common financial errors that can harm your business and the steps you can take to avoid them:
1. Not Making a Business Plan
A business plan is a written document outlining the goals of a company and the steps it needs to take to achieve them. An entrepreneur may be excited to launch their vision or desire to build momentum by starting quickly without a concrete blueprint for their business. However, without such a map, it can be easy to get off track when the inevitable challenges arise.
A business plan helps attract investors by showing that you are working on your objectives and meeting benchmarks along the way. It can also help you evaluate the success of your company. Without a detailed plan, it would be challenging to tell if you’re on the right path or not.
2. Mixing Business and Personal Funds
Mixing business and personal funds can increase your risk for debt. Furthermore, it will make it difficult to evaluate your business’s cash flow and overall financial performance.
For example, you’ll have a hard time figuring your tax liability and will be unable to provide accurate financial records when applying for a business loan.
You can ensure proper management of business finances by creating separate savings, checking, and credit card accounts for your business. You should never dip into business accounts for personal purchases and never use personal funds for your company’s needs.
3. Failing To Budget
A budget is a plan for the business expenditures over a given period. A small business may plan daily, weekly, monthly, quarterly, and annual budgets depending on its industry and operations.
Ideally, a budget will guide you to profitability and help with day-to-day financial decisions. It works hand-in-hand with a business plan to guide your choices in the early stages of your business.
In addition to planning expenditures, you should continually update your budget to account for any income or strategy changes or the expansion of your business. You should also establish best practices for yourself and for all employees to adhere to your budget for all business-related spending.
4. Avoiding All Debt
Debt is nearly inevitable for startups and small businesses. Most companies need to invest in their operations before they become profitable. Your business could suffer from a high debt-to-income ratio if you are not strategic with your borrowing. However, if you obtain loans to invest in things that contribute to your business’s growth and development, debt may bring positive results.
This “good debt” can help your business grow in the right direction, and it can build your credit history if you pay it back when it’s due. At the same time, you want to avoid debt that will not add value to your company or does not fit with your established budget and business plans.
5. Improper Credit Card Use
Some entrepreneurs may find it easier to fund startup costs with credit cards instead of going through the business loan application process. But there are specific drawbacks to credit card debt. First of all, the interest rates are usually high compared to a loan or line of credit. Secondly, late payment fees and penalties can make monthly payment requirements unsustainable.
If you use credit cards to finance startup costs, it could affect your business’s profits in the future. Furthermore, this debt could harm your company’s creditworthiness and make it challenging to get a business loan. These cards typically have a lower credit limit, so you will max them out quickly, which will decrease your credit score.
The solution is to opt for business-specific loans, lines of credit, and other options. If you are already in credit card debt, you can seek a business debt relief option to help get your finances back under control.
6. Spending Too Much
Some entrepreneurs are overly optimistic when they launch a startup. They spend on items that do not add value or aid in the development of their business. Overspending early can leave you without sufficient funds to cover any unforeseen expenses or necessary changes to your business plans.
Other business owners may confuse spending with development and think success requires purchasing certain items, equipment, or services that do not add value to the operation.
You can avoid overspending by creating and sticking to a budget. Only purchase items and make investments that are necessary to reach the next benchmarks on your business plan.
7. Not Spending Enough
Business owners who spend too much can hurt their long-term prospects for success, but those who are too cautious with their spending may also face challenges. Companies cannot succeed without investing in the necessary equipment, services, marketing, and development.
You need to define what investments are necessary to perform daily operations, meet goals, and remain competitive in your industry.
Could investing in these necessities lead to excessive debt? Things may not work as planned, or competitors may alter their operations to respond to your company’s growth and force you to invest more to remain competitive. If this happens, you can explore small business debt relief options to get your finances back on track before it’s too late.
8. Undercharging Customers
Small company owners may think they have to charge customers less than the competition to attract business. This strategy can prove challenging because you may initially be able to attract more customers. However, in most instances, the lower prices will not be sustainable, and you will lose these customers if you do not give them another reason to stay.
You can avoid this problem by finding ways to compete other than offering a lower price, such as providing better services, selection, or products. Also, be sure the prices you set are competitive with others in the industry and will bring enough profits to help you reach your short- and long-term financial goals.
9. Getting Behind on Taxes
Businesses need to meet their tax obligations. Failure to pay the required taxes on time can lead to civil and criminal penalties. Even companies that make honest mistakes with paperwork or filing dates may have to pay fines.
A business needs to stay on top of sales tax, payroll, and income taxes. Depending on your industry, you can set up monthly or quarterly payments rather than covering all the taxes once per year.
Furthermore, filing taxes on time can help you earn deductions for things like business expenses, travel costs, and investments, which could lower your tax bill. An in-house or third-party accountant or accounting software can help you keep records and file taxes on time to avoid any issues.
10. Inaccurate Recordkeeping
Maintaining accurate legal and financial records is essential for your business. You need to use this data to track expenditures, measure success, calculate tax obligations, and meet reporting requirements.
By using inaccurate records, you can’t get an accurate picture of profits and losses, which is necessary to measure success and plan strategy. Furthermore, both investors and lenders will want to see detailed records of your financial performance when deciding whether they want to invest in your business or approve your credit application.
At National Debt Relief, we take pride in empowering people to regain their financial stability through our proven debt relief program. Contact us and talk to a financial expert who will work with you to find the best option to settle your debt and help you achieve financial independence.