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10 Costly Financial Mistakes Small Businesses Make

As a business owner, encountering challenges on your way is inevitable. However, one challenge that becomes the cause of the shutting down of numerous businesses is finance management. Even the slightest error ignored can damage the business capital.

Thus, it becomes absolutely necessary that as a business owner, you are aware of the financial mistakes other business owners make and also avoid them. Knowing what steps to take to grow your business, paired with the financial knowledge required to run a business, you can make the maximum ROI.

Costly Financial Mistakes Small Business owners make

So, let’s look at the common financial mistakes small business owners make:

Not setting business budgets

One of the most common financial mistake that majority of the business owners make is not worrying about the calculative spending.

Initially, things are a bit unclear, and every opportunity might seem to require more investment.

This can lead business owners to overspend, investing in everything that comes their way. Even finance teams that create detailed budget plans sometimes fail to follow them during actual spending.

However, if your company has already set strategic goals for the current quarter, planning flexible budgets becomes much easier. Budgets provide guidelines on what’s permissible for each expense category.

It’s now up to the teams to find feasible solutions within these guidelines. Start by listing all your expenses and categorising them. Estimate the amount needed for each category, including both fixed and variable expenses, and set limits for the variable ones.

Next, compare these expenses with your projected income for the same period. Be realistic: overestimate your expenses and underestimate your income to avoid any unpleasant surprises.

No business plan to run the business

A business plan acts as a blueprint for your business, outlining its structure and functions. Operating without one is starting a journey without a map; there’s no clear direction or destination.

A business plan is a foundational document detailing your business goals, timelines, and methods for achieving them. Without it, your teams will lack direction and struggle to understand their objectives and roles.

business plan

Starting your business in Melbourne processes with a well-crafted business plan is crucial. But how does a business plan relate to finance? It helps you determine the necessary funds to start and operate your business.

Many founders skip this step, thinking business plans are solely for securing funding. This is a misconception. A business plan sets milestones for different teams, guiding them not just for the upcoming year but for the next three to five years.

Not planning properly for tax liability

Many founders overlook tax as an expense until the tax period arrives, leading to last-minute stress and increased liability.

It’s essential to start planning for tax liabilities from the very beginning, regardless of whether they seem applicable. Many startup owners neglect this, only to face significant tax liabilities and penalties later on.

Every country and region has its own taxation structure. Some locations are tax-friendly and offer numerous exemptions for new business owners. Failing to identify these opportunities in time can be costly.

Conduct thorough research to discover the benefits available to you. Your individual and business tax liability also depends on the business structure you choose, so prioritise this while creating your business plans and budgeting your expenses.

Not choosing a legal structure to run the business

Every business eventually goes through the registration process and chooses a structure, such as an LLC, corporation, or sole proprietorship. Some startup owners find this step unnecessary and delay it.

Choosing a legal structure can be confusing because it affects the power, authority, and liability of the owners. However, registering a startup has many benefits. Each country has its own rules for business structures, but they are generally similar with some differences.

For most startups, an LLC (Limited Liability Company) is the best choice. It limits the owners’ liability to only what they invest and protects their personal assets.

Registering your business also helps when you want to expand. It makes it easier to get financial assistance from banks because your business is officially recognised.

Taking more debt than required

There are two types of new business owners: those who save every penny and bootstrap their business and those who take out loans and seek financial help.

managing business finances appropriately

Both approaches are fine, but taking on too much debt can become a problem when it’s time to repay it. Remember the business plan you made? Use that plan to guide you on how much money you need to run your business smoothly. While business loans can provide quick capital, they’re not the only option. There are other ways to raise money.

You can look for investors or venture capitalists, use your savings, or get help from family and friends. If your revenue doesn’t meet expectations, repaying a large debt can be very challenging.

Late payments can hurt your business credit score, making it harder to get more financial help in the future. Do a proper financial analysis, figure out what you really need, and try other funding options before going to a bank.

Having low working capital

One common financial mistake business owners make is underestimating their initial expenses. Once you start your business, you’ll quickly see many expenses, and you might not have enough funds to cover them.

Having low starting capital limits your operations and can make it hard to pay for essential things. You can’t rely on inconsistent or nonexistent income.

This is why it’s important to gather funds to build your working capital. Your initial working capital should cover your basic expenses for at least six months.

As mentioned earlier, you can use various methods to raise funds. Many startup owners hesitate to ask for help after hearing about debt problems faced by failed startups.

They try to get by with what they have. However, if you understand your needs and choose safe, readily available financing options, you’ll be able to repay faster.

Extra inventory

It’s okay to be optimistic, but a common financial mistake startup owners make is being too optimistic and stocking up more than needed.

If you buy too many raw materials or produce too much inventory, you can disrupt your cash flow. You’ll also spend more to maintain these extra stocks.

Instead of tying up resources and wasting materials, focus on producing only what’s necessary.

Poor pricing strategy

The price you set for your product impacts your profit margin. Starting with low prices to attract customers might bring in some profit initially, but it can be tough to sustain later on.

Before setting your product’s price, conduct a thorough analysis of the market and your competitors’ pricing. This is crucial to do from the beginning.

importance of right pricing strategy

If you start with low prices and later raise them, customers might feel it’s unfair and switch to other providers. Eventually, you’ll likely need to increase prices to cover operating expenses.

Instead, aim to develop a high-quality product or service and price it according to the market average. Focus on finding customers who see the value in what you offer.

Selling fewer products at higher prices can be more profitable than selling more products at lower prices.

Neglecting business insurance

If your business owns many physical assets and properties, getting insurance to protect them is crucial. However, many small business owners see it as an extra expense and overlook finding adequate coverage.

Some may even cancel their insurance plans or opt for cheaper policies that don’t offer full coverage. If you’re unsure about the right insurance for your business, seeking professional help to find the best policy is a wise move.

Not having an emergency fund

Having emergency funds is essential for both personal and business purposes. In the business world, unexpected challenges can arise at any time.

To stay prepared and ensure your business can weather emergencies, you should have an emergency fund. The amount you need may vary depending on your business stage.

Ideally, your emergency fund should cover two to three months of your business expenses. Whenever you receive funding or start generating profits, make it a habit to set aside some savings.

Build a strong emergency fund that you never touch unless there’s a genuine emergency.

How Can Clear Tax Help Manage Finances?

Every successful business owner planned their expenses and finances since the very beginning. They do not step back from investing in the right service that can help them manage all the business expenses rather than spreading bills all across tables.

Need help with business finances?

You can be one of such business too and seek professional assistance to maintain your accounting and financial activities with the help of Clear Tax Accountants. We are a team of professional business accountants in Melbourne who can take off the burden of financial management off your shoulders, giving you plenty of time to focus on the growth of your business.

So contact us today!

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