This article is for educational purposes and does not constitute legal, employment, or tax advice. For specific advice applicable to your business, please contact a professional.
There are a few common financial mistakes small business owners might make that could be avoided with the right planning and tools. Here are a few money mistakes to keep your eyes on as we start off the new year.
Mixing business and personal accounts
Many small business owners are first-time entrepreneurs which means that personal and business accounts can be confusing. However, mixing business and personal accounts for business transactions or funds can lead to cash flow management and tax issues. It is also important not to use your business credit card or debit card for personal expenses.
- It can affect taxes: According to the Inland Revenue Department, business owners can only deduct business expenses, so if you run your expenses through your personal bank account it will be hard for the Inland Revenue Department to determine if your business is a hobby or a company. This could open your business up to serious risks if audited.
- It can affect your Cashflow management: Mixing up personal and business expenses together can affect your cashflow management of the business. By keeping the accounts separate and paying bills on time, you can manage your business cashflow better.
Not managing cash flow
Operating a business comes with risk, but by managing cash flow closely you can plan better for the future. Cash flow management is the process of tracking how much money is going in and out of your business. By keeping an eye on cash flow, you can better manage your debts, like paying employees, suppliers, and more. Many small business owners worry about amassing too much debt too quickly — here are a few common pitfalls that may contribute to this:
- Making large purchases for your business: If you’re looking to reinvest in your business, you may want to hold off on large purchases without projecting the potential ROI. Purchasing an espresso machine to serve customers coffee might bring in more revenue, for example, but it will also tie up your cash temporarily. You can maintain better control of your cash flow by being careful to not overspend on any unnecessary startup costs. As your business grows, you’ll be able to reinvest more and more into your business.
- Incurring credit card debt with the expectation of possible future revenue: Similarly, you may want to invest in marketing or inventory ahead of seasonal occurrences. But by making purchases with no guaranteed return on investment, you’re exposing your business to some risk.
- Not leaving any buffer room/emergency fund money: Having a certain amount of liquid cash set aside for emergencies can protect you against unexpected expenses. According to a 2016 J.P. Morgan Chase study, small businesses reserve about 27 cash buffer days. This means they have about 27 days of money as a buffer before running out.
Many small business owners have limited cash liquidity and irregular cash flow. The combination of a small cash buffer and irregular cash flow can contribute to financial issues. Employing some of these tools to avoid financial mistakes can help you better plan ahead and give you some room to make mistakes and cover unexpected expenses.