7 Common Financial Mistakes Business Owners Make
by Lacie Martin
Whether you're a parent running a start-up or you've been building your business for a while, financial mistakes come with the journey. Optix Communications explains that it's important for you to understand these challenges and avoid any pitfalls to make your business a success.
Making Large and Unnecessary Purchases
When you're just starting, it's tempting to use financial backing to rent nice office space or get the latest, sleekest machines. Fancy perks and large office space are two of the most unnecessary expenses when you're just beginning. Start small and build your way to affording those purchases.
Not Securing Your Data
We live in a data-driven world, and if your business data is not protected, you're not protected. This is particularly true if you receive customer data, such as personal information and payment transactions. Ill-willed hackers live to breach your firewalls – if you have any – and to steal whatever information they can, whether it be in the form of malware, ransomware, or SEO spam. This puts your finances and your reputation on the line. The solution is to invest in cybersecurity services to deter cyberattacks and, if data is breached, to quickly recover and allow you to continue operations.
Not Getting Business Insurance
Within a decade, The Hartford notes that there's a 40% chance your small business will file an insurance claim. Coupled with the fact that businesses are woefully underinsured, this is a recipe for serious penalties, fines, or worse, depending on state laws. Theft or loss can happen to anyone. This can devastate your business, especially if it relies on an invention that hasn't been patented yet.
Mixing Business Money With Personal
This is a common mistake that happens early because it's convenient and seems innocuous, especially if you're a sole proprietor working at home with kids. But it's a bad idea for many reasons, including how it negatively affects your personal credit, in addition to the increased possibility of incurring a tax audit. Venturize points out that separating business and personal finances helps you get a clearer picture of your business's health.
Not Having Emergency Cash
If there's one lesson a global pandemic has taught everyone, it's the need to be prepared. Because of COVID-19, the government rolled out several forms of financial assistance. However, if you need a loan during less intense times, remember that while banks offer lower interest rates, it's a challenge for small businesses to get approved. Work with an accountant to get your finances in order before applying.
Lack of a Thoughtful Budget
Although having a business plan is seen as standard procedure, it turns out that about half of small businesses don't have a written budget plan. Without a budget in writing, you can't properly analyze your finances or track erratic cash flow trends that can drain you. Having a formal budget gives you a chance to review your financial habits and see how they match up with expectations and goals at different phases of your growth.
Not Paying Yourself Enough
Denying yourself a salary until the day you can earn six figures a year is a romantic notion that entrepreneurs claim as a right of passage. However, the reality is that not paying yourself a salary compromises your personal finances. The average annual salary of a small business owner is nearly $65,000, which can definitely keep your life stable while you build your dream.
Organize Your Business Finances
It's easy to fall into the trap of disorganized financial habits. The best way to stay on track is to remember that lack of fiscal responsibility is a short-term solution that can attract unfortunate long-term consequences.
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