7 Most frequent financial mistakes you should avoid in your small business

financial mistakes

Managing a small business poses very particular challenges. Fortunately for the owners of new companies, there are many other small companies that have already faced these obstacles and have been able to overcome them. New companies can learn from their peers what is the best way to avoid these common financial mistakes.

By knowing in advance what the challenges are, you can reduce the learning curve and protect your financial resources, saving yourself many unnecessary penalties.

Here we share with you 7 common financial mistakes in small business

1. Insufficient capitalization

Having enough money to run the company is a huge challenge for any business. Often, only getting the initial capital, and in a sufficient amount, is a full-time job. Entrepreneurs are often overly optimistic about their businesses. They believe that they will be self-sufficient (positive cash flow) in a year, that they can market online for free, that there will be no problems during the development of the product, and so on. On very rare occasions things go as planned. Many business owners discover that the company’s growth takes at least a year beyond what they had originally estimated. Meanwhile, they are consuming their initial investment and quickly depleting the funds.

financial mistakes

To avoid this financial mistakes, be conservative when projecting into the future and then be even more conservative. Have others review your right financing plan and ask them to advise you sincerely. Use mentors to give your opinion about your plan and raise your concerns about problems you might face that you may not have considered. At a minimum, no matter what you think your capital needs are, you will most likely need to double that amount.

2. Assuming long-term financial commitments too early

Many owners of new companies want to launch fully once the company’s financing has been obtained. Having the total sum of money can give you a false sense of security and make you feel that the money will never end. In general, the first things in which money is spent are hiring several employees, renting larger offices, taking out insurance policies and leasing equipment.

Without knowing how fast, or how slow, your business is going to grow, this creates a real problem. Now you have several commitments that will not be easy to get rid of. Instead of being aggressive with expenses, be as conservative as possible. When your company begins to feel the problems of growth (insufficient staff, lack of space, excessive delay to dispatch orders, etc.), only then should you think of spending money on more space and more employees, not before.

3. Poor accounting

Poor accounting is most of the common financial mistakes in your small business. It may be easy to lose track of how the financial situation is. Simply monitoring the cash you have in the bank is not enough. The lack of financial reporting means that you do not have a perspective of any financial trends, which minimizes your ability to be proactive and make prudent financial decisions. It’s easy not to worry about your finances if you have money in the bank and do not see that it will run out soon. But, when the cash flow decreases over time, the moment of panic suddenly arrives.

financial mistakes

Accounting is not as scary as it seems. Hiring a part-time accounting assistant who can write basic financial reports for you can be very useful. These reports allow you to track performance, see where you are spending your money and help you project where your business is going in the future.

4. Distribution of resources

When evaluating all options for investing capital, weigh the cost-benefit ratio of each option. Ask yourself questions like “What is the best investment: hiring another employee or moving to a larger space?”

By distributing the resources you have prudently, you will avoid spending too much and will be forced to consider thoroughly why you are investing in a particular resource. Assessing the pros and cons of a specific expense will help you determine what is expendable or help you think of other, more profitable alternatives.

5. Lack of foresight and budget

Having an action plan is fundamental to your business. The sales forecast and an expense budget is the route map you need to run your business. Often, small business owners have limited time, and making a budget is not among their top priorities. The problem is that without a roadmap, you will never know if you are on the right track.

Create a forecast and a budget, even if they are simple, as a reference to evaluate your performance. By having a monthly guide that tells you what you plan to invest your capital, you will know if it will last all that you expected.

6. Not wanting to spend on insurance

Thinking about insurance as an expense that you can risk not acquiring and saving that money is a serious financial mistakes. Nowadays there is a great diversity of insurance types and companies; Each of them has its advantages. I do not suggest you buy insurance for everything, but there are some basic ones that are worth trying to acquire and you will really appreciate having done it if an unfortunate day presents itself.

financial mistakes

The most recommendable insurances are the ones of auto and of greater medical expenses. Look for the car to cover at least damages to third parties, thus avoiding debts with third parties or legal problems.

And yes, of course, you can live without insurance, but you will not want to do it in case of an unforeseen event. Add these services to your list of monthly fixed expenses and you will not suffer so much.

7. Do not buy wholesale

Because there are things that we need to buy with short periodicity because they expire, we usually take advantage of and buy everything in the supermarket. For example, we buy a bar of soap and when it is finished we buy another one; It is common to think that if you bought a box of six soaps. You would save very little, then you do not mind doing it one way or another.

But even if the difference in a product is small, buying wholesale all the products that are provided will represent a great long-term saving.

A good idea to start putting it into practice is when you receive extra money, such as your bonus or a bonus. Use this income to stock your pantry in a wholesale store for the following months. Remember to try to keep track of how long they last and how much money you saved to evaluate if you should continue buying this way.

Enjoying economic stability is only a matter of planning your finances well and being constant. It is important to identify unnecessary expenses and avoid making financial mistakes of this type. You will see that your salary can yield more than you think.

By implementing practices to avoid these 7 common financial mistakes. You will save a lot of time and resources and will be able to concentrate your efforts on growing your business. As a small business owner, it is better to invest your time in being proactive and not reactive.

Tony Jimenez

Tony Jimenez

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