Many small business owners struggle with financial management. As an owner, there is a responsibility to make sure the business is growing and thriving in the most effective way possible.
If you're not careful, however, you could end up making costly mistakes. The U.S. Bureau of Labor Statistics research found that approximately 20 percent of small businesses fail within their first year, with that figure increasing to 45 percent by the fifth year.
While many factors contribute to failure, the most significant are cash flow and financial management problems.
From capitalization issues to budgeting to inaccurate bookkeeping practices, a lot can go wrong. Whether the business is just opening its doors or has made it through the first few years, implementing smart financial practices is critical.
To prevent financial disaster, make sure to avoid making these common mistakes:
- Failing to separate personal and business accounts
As entrepreneurs start their business journey, they may neglect to open a separate business account, believing it is easier to work from their personal account — at least until they start seeing returns on initial investments.
Keeping these accounts separate permits monitoring of all business expenses and proper maintenance of the business budget.
- Not tracking expenses
When the business is first getting off the ground, there may not be a lot of capital to invest in growth. Control of debt is imperative and that's why it's essential to track and manage expenses.
- Not setting or sticking to a budget
Budgeting is an essential part of financial management. It allows for adequately addressing resources and helps to make sure to not spend more than is coming in.
Adhering to a budget protects against missing a financial detail that could significantly impact business sustainability.
Remember to budget for future expenses, too.
- Neglecting business credit
Many business owners neglect their business credit and don't realize that it's an important part of financial management.
Owners must maintain good business credit to grow. A poor business credit score makes it a challenge to get a loan.
Check your credit report regularly for changes or unauthorized activities.
- Understanding business taxes
When first starting out, many owners tend to be confused about business taxes. If you're not careful, costly mistakes could be made so get professional help as needed.
Always file taxes on time, keep current with due dates, regulations and staying compliant.