Financial Mistakes Small Business Owners Make
The dream of owning your own business one day is very much alive and well. Especially when words like “entrepreneur” and “entrepreneurship” are found everywhere we look. The sad reality is, that according to the Small Business Administration, more than 30% of small businesses do not make it past the first two years of operation, and approximately 50% of small businesses do not make it past five years. This statistic comes about because of the mismanagement of money and cashflow.
There is a lot of information and material on the internet that can help small business owners in managing cashflow and finances better, but we thought we would join the party and list a few in hope of assisting businesses and bettering the statistic.
1. Separate Your Personal and Business Accounts
We have seen this in so many cases. Small business owners run their personal expenses and lives through the business and it interferes, and leads to mismanagement of funds and cash flow. It doesn’t matter if you are the sole owner of the business, business transactions should be captured, accounted for and managed separately in order to run the business properly. It doesn’t even have to be a separate bank account. If you are a sole proprietor for example, it’s as simple as opening a cheque or savings account within your existing bank account and separating the transactions between personal and business.
Separating the two will allow you to understand the business cash flow in a much clearer way and enable you to create strategies to help the business sooner rather than later.
2. Tax, Tax and Tax
Three simple letters that say a lot. Tax, for most people, is a scary word. In all honesty, we are not going to sit here and tell you the benefits of tax and how tax is good for your business. But, what we are going to tell you, is that there is no way around the paying of the tax, but there is a way in coping with the payment.
There are a few ways to better the burden of tax. The one that we chose is appropriating a tax portion into an interbank savings account. This will help with cashflow when the time arises to pay tax. You heard of the saying: “out of sight, out of mind”? Well, this is a similar concept. Work out your tax portion per month, per quarter, however you decide and then transfer that money into a savings account. Not only will it be there when the time comes to pay the tax, but you can also earn some interest on it. Win, win.
3. Being Prepared for a Rainy Day
Have you ever been caught in a rainstorm without an umbrella? Well, this is a similar concept, except, it’s not your hair and clothes that get messed, it’s your business. It’s your inventory, your staff and eventually your customers. Not having cash set aside for rainy days is a main driver of businesses not coping when the “rain” comes.
A little word of advice, speak to your bank and set up an internal debit order that takes a certain amount every month from your current account to your savings account. That way, when the “rain” comes, you always have some back up cash in your kitty to tap into and help you manage get through it.
Owning a business is an amazing concept, do not let statistics drive you away. Rather, learn from other’s mistakes and make sure you manage your finances better. Yes, we understand, money management can be stressful, but it shouldn’t be complicated and unattainable. With the right planning and strategies, you can make sure your business can avoid cash flow problems to the best of your ability.