If you’re a small business owner, cash flow is always on your mind. You need to keep track of expenses, ensure you’re making enough revenue, and find ways to save money where possible. But even if you’re good at managing finances, there are mistakes that some small businesses make that can cost them greatly.
Here are the top 5 financial mistakes small businesses make, and how to avoid them.
1. Not tracking expenses
Every business needs to keep track of its expenses and profits in order to understand exactly how much money comes in and goes out. You should be able to tell at any given moment whether you’re making money or losing money.
The first thing you should do is to ensure you’re not spending money on anything unnecessary. You can start by looking at your bank statements online or by using any accounting software. You can also use apps like Mint or Quickbooks to keep track of all your expenses and see what you’re spending money on (some recurring fees may surprise you).
Set a budget and decide how much you can afford to spend on various expenses such as payroll, office supplies, inventory, and marketing. If these numbers start to grow too big, you should make adjustments accordingly.
2. Lack of a cash reserve or “rainy day” fund
In life and in business: everyone needs an emergency fund. Unexpected expenses can quickly derail your business if you’re not financially prepared, so by building up a cash reserve, you can avoid disruptions in the event of an emergency. This is especially important if your business is a sole proprietorship or partnership because you are personally liable for all debts accrued by the business. The general rule of thumb is to have a minimum of 6 months’ worth of expenses on hand at all times.
The most common emergencies for businesses are related to cash flow, such as a sudden drop in sales or if one of your customers doesn’t pay on time. Have a plan on how to raise cash quickly. A Finance consultant can help you create a plan that is right for your business, whether it’s approaching your bank, negotiating bill payment terms, or discounting items for quick sales.
3. No marketing plan
The purpose of a good marketing strategy is to ensure that your small business is reaching its target audience most effectively, while at the lowest cost. Having a clear marketing plan helps businesses gain new customers, increase sales, and grow brand awareness. Small businesses often think that they cannot afford to invest in up-front marketing and advertising planning, but the truth is that these investments can actually save the business money in the long term by avoiding marketing methods that underperform or bring undesirable leads.
With a detailed marketing plan, businesses are able to better utilize their budgets to get the best ROI by tracking their progress using KPIs (key performance indicators)—such as specific conversion rates for online ads or the click-through rate (CTR) for an email campaign—and identifying areas where they can cut costs. For example, if you find your cost per click (CPC) on a Google Ad is running close to $5/per click but not converting to sales/leads, you should consider a new ad. Examples like this show how staying on top of your marketing plan can help keep your expenses low. Don’t be afraid to invest in some good old-fashioned marketing—it just might be the thing that saves your small business!
4. Relying on only one revenue stream
If there is one thing the Covid-19 pandemic has taught us, it’s that nothing is guaranteed. Our way of life and global economy can change at any given moment. This is especially true as a business owner and proves why it is important to have diversified revenue streams to protect your business from financial instability. While it may be tempting to put all your eggs in one basket and hope for the best, relying on just one source of income is risky. For example, if your primary source of income is from brick-and-mortar sales, consider online sales as well. You can not only reach customers outside of your store’s radius, but can also provide backup sales in the case of uncontrollable and unforeseen circumstances. When exploring online sales avenues, consider wholesaling products to other businesses, or selling products through third-party platforms like Amazon or eBay.
Diversifying your revenue streams also gives you more opportunities to grow your business by diverting that extra income into other revenue-producing projects. On the contrary, businesses that rely only on one source of income are often limited in how much money they can make. There are many ways a business can diversify its revenue streams such as expanding the customer base, offering new products or services, and using different marketing techniques. By taking advantage of multiple channels of income, businesses can insulate themselves from financial risks and position themselves for long-term success.
5. Commingling between business and personal accounts
One of the best ways to ensure healthy finances for your business is to maintain separate bank accounts for your personal and business expenses. When you mix personal and business funds, it can create problems with bookkeeping and accounting.
When you commingle your funds, it’s difficult to track and report expenses accurately, which can result in you paying more taxes than necessary. In some instances, it is even required by law to have these accounts separate. Additionally, having a dedicated business account is important when applying for loans, to build your company’s credit history and credibility with potential investors.
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