So you’ve decided to go into business for yourself. You’re very talented and you’re the best there is when it comes to your trade. But chances are you’ve got no idea how to operate the financial site of your business.
If that describes you, you’re not alone. Many business owners are great at performing the core function of their business but lousy at managing the finances. Because they’re not necessarily trained on the business finance side of things, a lot of entrepreneurs and biz owners fall prey to some common financial pitfalls. I don’t want that to happen to you, so I put together some tips to help you avoid some common mistakes made by small business owners and entrepreneurs.
– Keep your business accounts and personal accounts separate.
I’m speaking from personal experience through a family member here. The IRS doesn’t like it when you buy personal items, gifts, jewelry, and other miscellaneous stuff with a business’s account. You need to pay legitimate business expenses with the business’s money. Everything else needs to be paid for with your personal account.
Besides that, it will be much easier to track the business’s expenses and income when you have separate accounts. It also helps protect you from personal liability for business debts (depends on the type of entity you operate as)
– Do a business budget.
This sounds so simple yet so many business owners neglect this step. It’s one of the least pleasant tasks to do as an owner, next to bookkeeping (see next bullet) so it perpetually falls to the back burner. Many entrepreneurs figure they know the business inside and out, so they know when it’s doing well and when it isn’t.
Listen, I don’t care how good you are, you cannot keep everything in your head. You’re going to forget something at some point and it will cost you. Guaranteed.
It’s critical to do a written budget for your business each month. This helps you project and track cash flow, be proactive with your operations, and make sound decisions with your company’s money rather than having to decide expenses based on emotion in the heat of the moment.
– Hire a bookkeeper.
If you’re like me and absolutely hate data entry and reconciling checkbooks, you need someone on your team that can do the bookkeeping, and hopefully even file taxes for you. This does not relinquish you from the responsibility of knowing what’s going on with the business finances. This simply delegates the monotonous task to someone who enjoys it (and who is trustworthy).
Never forget, it’s still your responsibility as the owner to review the numbers, reports, and budget each month, if not more often. But that doesn’t mean you have to do all the work. It’s ok to delegate to a strong player on your team.
– Don’t focus so much on the tax deduction.
So many business owners buy lots of new stuff for their businesses because they can get the write off on their taxes. That’s one of the worst reasons to buy something. If you didn’t need the item, you’re justifying paying a dollar to save 30 or 40 cents.
I mean, let’s be real here. You didn’t really need a Hummer for your business. Your used pickup was doing the job just fine. You just really wanted a Hummer and you used the tax deduction as a rationalization to talk yourself into buying it.
If you truly need the item, feel free to use the reduced taxes in your calculation of the return on your investment (ROI). Just remember that the tax deduction doesn’t necessarily reflect actual cash flows.
– Be careful buying in bulk.
It’s not a good price if you can’t move the product. If you’re a business that stocks inventory, you need to be careful with buying in bulk. You may get a cheaper unit price when you buy in bulk, but that doesn’t mean you’re better off. If you can’t turn the inventory over, you ‘re tying up cash flow (and possibly wrecking your cash flow).
It’s like buying a 5 pound bucket of pickles for your family of four because it’s cheaper on a per pickle basis. Nobody wants to eat that many pickles. You think you’re saving money but four years later the pickles will still be in the fridge and you’ll end up throwing them out. You thought you were getting a good deal but you were really wasting your money.
This is by no means an all-inclusive list of success tips for business owners, but these are common mistakes I see on a regular basis. Paying attention to these steps will help you preserve your cash flow, which is the lifeline of the business. Without it you’re dead in the water. With it, you’ve got a chance to be profitable, which is the one of the main reasons you’re in business in the first place.