By Princess Jones
Regardless of industry and business type, all small business owners go through bumps and bruises financially. There’s a theory out there that failures make the best teachers. That may be true, but learning from the mistakes of others is a great way to get the lesson without the bruises. Here are four common small businesses financial mistakes and how to avoid them.
Thinking Income and Profit are the Same Thing
Many a small business has closed its doors over the space between income and profit. Income is what money comes into the business. Profit is what money it keeps after paying all of its expenses. Sometimes a business can lose money and still continue operating for some time because of the float between income and debt are handled. It doesn’t make it any less of a bad situation. If your business is losing money it’s only a matter of time before you don’t have a business anymore.
Avoid this trap by paying close attention to what your profit margins are. Don’t be fooled by what’s coming in the door. Pay close attention to what’s going out. Run the leanest operation you can. Keep your overhead as low as possible without sacrificing quality in your product and services.
Overspending on Tools and Staff
We often talk about how trying to do everything yourself only burns out the small business owner. But the flip side of that is trying to bring in too much help too quickly. When you overspend on equipment, tools, and staff, you put your business in the tough position of having to support those purchases with sales. And if you’re not financially ready to do so, you can put dangerous strain on your business.
To avoid this mistake, carefully plan out startup costs and overhead. Be conservative in your financial forecasting when taking on new expenditures. Talk to your business mentors about the tools you’ll need and how what stages your business will be in before you need them.
Waiting Too Long to Get An Accountant
Bookkeeping is a basic small business need. It’s the very least you can do to manage your business’ finances. But a big mistake small business entrepreneurs make is relying solely on bookkeeping long after their business has outgrown it.
What does your business need? Well, it depends. A bookkeeper’s job is to record and organize financial transactions. They will be able to tell you what’s coming in and what’s leaving. An accountant’s focus is more on reporting and analysis. They can advise you about taxes, benefit packages, and the company’s financial future.
How do you avoid this mistake? Get an accountant as soon as your business has overcome the initial hurdle of making regular income. Keep in mind that you’ll still use a bookkeeper or software to record and organize the day to day financial transactions. You’ll use your accountant to manage the big picture.
Not Planning for Emergencies
From natural disasters to personal disasters, emergencies are unpredictable. You can’t know when they are coming or what they are bringing with them. But you can count on the fact that they will come at the worst possible time. And for a small business owner, sometimes all it takes is one emergency to take down the whole operation.
Avoid being ruined by emergencies by hoping for the best while steadfast planning for the worst. Always have disaster plans in place and make sure all of your key employees know about them. Buy appropriate insurance for your industry and keep your premiums up to date. Set aside emergency funds that can be used when things get rough.