Running a business can be an exciting and rewarding journey, but it also comes with daunting challenges. It’s important to be on top of your small business’ financials to create lasting success, but let’s be honest — who hasn’t fallen into a financial pitfall or two along the way?
In this blog post, we’ll dive deep into the most common financial mistakes business owners make and show you how to avoid them. We’ll cover everything from not separating personal and business finances to not keeping track of taxes.
Business financial mistake #1 — Failing to separate personal and business finances
This is a mistake business owners make in financial planning — especially in the early stages. It’s easy to get caught up in the excitement of starting a venture and procrastinate setting up dedicated financial accounts for your small company.
However, mixing your personal and business accounts can lead to myriad cash flow complexities, and one problem will quickly lead to the next. First, it makes it harder to monitor transactions, which in turn creates tax issues and difficulty in proving business income and expenses. Consequently, this makes it challenging for your company to secure financing in the future.
As an owner, you should immediately open a dedicated bank account and use it exclusively for business transactions. You may also apply for a business credit card to easily keep track of business expenses.
Business financial mistake #2 — Not having enough emergency funds and cash reserves
By analysing data and perhaps employing your natural business intuition, you might be able to predict the outcomes of your operations and campaigns. But even then, every successful businessman will tell you that unexpected expenses can occur anytime — and without adequate cash reserves, it can be difficult to cover them, leaving your business in a precarious financial position.
To avoid this, aim to always have enough cash reserve to cover at least 3 to 6 months of operational expenses. As a budding entrepreneur, avoid making unnecessary purchases when you experience early success and prioritise maintaining a healthy business cash flow instead.
Business financial mistake #3 — Not prioritising collections
This financial pitfall is prevalent in service-oriented businesses, especially those in competitive industries. To gain market share, many owners are tempted to offer “pay-later” terms, which aren’t inherently wrong. What’s damaging is the easygoing attitude when dealing with unpaid invoices, hoping customers will pay eventually.
If this mistake applies to you, the solution is to simply be vigilant with collections and make them an integral part of your operations. You can set up a dedicated collections team or take it upon yourself to pick up the phone and collect. Set up a clear invoicing and payment process, and follow up on overdue payments. It might be flattering to look at a long list of receivables, but cash is king. More cash means less stress and bigger opportunities!
Business financial mistake #4 — Failing to keep track of taxes
Taxes can be complicated and overwhelming, but neglecting them brings severe consequences in the form of costly penalties and interest charges. Your tax obligations as a business will vary depending on many factors, including the size of your company, where you’re located and what kind of business you run.
If you keep in mind how much money you owe and take steps to legally reduce what’s due, it will help your business stay afloat for longer.
Business financial mistake #5 — Not seeking professional advice
Another common financial mistake business owners make in financial planning is not seeking professional advice. It’s easy to think that you can handle everything on your own, but most of the time, you don’t know what you don’t know. Not seeking professional advice can lead to costly mistakes and impede the growth of your business.
To avoid this, small business owners should always be willing to consult a financial professional, such as a seasoned accountant or financial advisor. They can provide valuable insights and help you easily navigate the financial side of running a business. They can also help you identify areas where you may be overspending or losing money and offer solutions to improve your financial situation.
Sidestep financial pitfalls through virtual CFOs
It’s obvious how managing your small business’ financials is crucial in ensuring your long-term success. But as we’ve seen in this blog post, it’s not exactly a walk in the park. The good news is with the proper knowledge and tools, you can avoid the common financial mistakes we mentioned here.
Surely, you’ve heard of a chief financing officer (CFO) — and if you think it’s absurd to hire one for your small business, you’re right. An in-house CFO can easily cost you upwards of $200,000 a year. But what if you can employ one for a lot less money?
Enter CFO On Call — a virtual service that provides the expertise of a chief financial officer at a fraction of the cost. For a monthly fee or one-time engagement, you will have access to a highly experienced CFO trained in large industry practices. We are the most prominent on-call financial control service in Australia and New Zealand, and our virtual CFOs can help you steer clear of common financial mistakes.