Running a business as an entrepreneur can often feel like a financial juggling act where you’re trying to balance your books and make your business stay financially successful while trying to focus on growth and customer service.
While it may sound really difficult to ensure your business is financially sound and survives in the long term, with few strategic measures you can actually achieve stable financials for your startup.
Here are five common financial mistakes small business owners make and how to avoid making them.
1- Not Registering as a Company
Incorporating your business as an LLC is a great idea. It forms something of a hybrid between a corporation and a partnership because you’d declare profits and losses on your personal tax return and receive some of the benefits and liability protection that you’d get from being a corporation.
Because an LLC is technically a separate legal entity that is much easier to administer than a full corporation, there’s no real downside to it.
2- Not Setting Up an Emergency Fund
Unexpected expenses can come from anywhere at any time and not having sufficient cash reserves to recover from them can be devastating. Your company delivery van might be in an accident or you might need to replace a vital piece of equipment that you can’t run your business without.
Not having the cash reserves or emergency funding plan to meet the unexpected situations an have expensive consequences, which usually results in having to make use of short-term lines of credit that you’ll not only need to service but will cost you more in the long run. Make sure you set up a business savings account and use it for these unexpected expenses.
3- Not Drawing a Salary
You might think not paying yourself will leave more money to invest in the growth of your business and while this is true, if your business can’t afford to pay you a salary and grow as it needs, then it’s not making enough money.
It also means you’re likely to use business money for personal expenses, as you aren’t maintaining an income to look after your own finances. If you’re under money stress then you’re not going to be as effective as if you aren’t, so don’t put yourself under this stress on purpose and draw a salary from your business.
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4- Not Maintaining a Budget
Budgeting is absolutely essential for businesses of any size because it allows you to plan out your finances for the coming financial period and ensures you have enough cashflow to cover your expenses and staffing costs while still making a profit.
Most small businesses would benefit most from a style of budgeting called a zero-based budget, where each year you start with a clean budget and build it with only the required expenses, giving you a good view on what is left over for expansion or new expenses. However, you choose to budget, having a working budget is non-negotiable for small businesses.
5- Having Too Much Stock
In the early days of your business, particularly if you’re a retailer or selling a service that requires physical delivery of a product, you’re going to need inventory to deliver.
A common mistake first time business owners and new companies make is to overstock their inventory and not make good use of procurement practices like just-in-time supply, which can leave you with more free cash, which is ultimately a good thing for your business, while aging inventory isn’t.
You also need to consider the storage space and costs of storing and maintaining all that inventory at your premises.
Wrapping it up…
There are many other financial considerations that entrepreneurs should consider and plan for, but these are some of the biggest and most important. Remember to plan and assess your long-term goals and align your financial position to achieve them because often these goals will be locked behind financial constraints.