5 Financial Mistakes to Avoid in Your Small Business

We all know that not every small business is going to “make it.” I’ve been in business for 10 years, and I’m still going strong, but my business is fairly easy to manage, and comes with very low costs. Not every other small business out there has the same advantages I do.

The Small Business Administration (SBA) estimates that about half of new establishments survive for at least five years, while about one-third make it to the ten-year mark. While there are lots of different reasons that a small business can fail, it probably doesn’t help when a business owner makes a lot of financial mistakes.

If you are just getting started in your small business, here are five key financial mistakes you need to avoid:

1. Lack of Cash Reserves

One of the biggest financial mistakes for small business owners to avoid is not planning larger cash reserves. There are a number of ways to fund a small business, and as you raise funds, you need to ensure that you have adequate cash reserves. You never know when a situation will come up and you’ll need to tap into your immediate cash--without time to apply for an emergency loan.

Don’t forget about cash reserves in your personal life as well. While you want to keep your personal and business finances separate, you also need to be prepared to take care of your personal needs while you’re waiting for your business to become successful. If you can’t fund your lifestyle, you’ll soon have to quit and get a job to earn enough money to survive.

2. Inadequate Insurance

None of us likes to think about insurance. However, it’s an important part of making sure your business is protected. Many business owners make insurance mistakes like canceling their coverage before they have a new policy in place, or they don’t realize what small business policies they need.

You need to make sure you have the right insurance for your circumstances, from auto insurance and health insurance to various liability policies that you might need to protect your professional reputation. You might even need to set up plans for your employees, if you want to be compliant with the ACA or offer attractive benefits.

3. Unorganized Accounts Receivable

Set up a system to ensure that you are paid. One of the hardest situations to deal with as a business owner is figuring out what to do when a client doesn’t pay. You can cut down on these situations by being clear about payment terms--have the terms printed on each invoice, and make sure they are clear when you create contracts.

You should also have a system in place that will help monitor which payments are overdue, and a system for sending reminders and taking other actions for collecting on what you’re owed. I use FreshBooks for my invoicing. Every week I receive a summary of who still owes money so that I can see exactly what the next steps need to be. I also have a process related to when payment is 60 and 90 days late. Get organized so that you can smooth your cash flow.

4. Neglecting Your Business Credit

While it can take some time to reach the point where your business qualifies for credit on its own, it’s important to do all you can to get to that point. It’s true that your personal credit matters when you first apply for business credit. However, that doesn’t mean that you should neglect your business credit. Do what you can to register your business with a business credit bureau, and use your number when completing transactions. Pay what you owe on time.

As soon as possible, do what you can to separate your business credit from your personal credit. Take steps to build your business credit, and eventually your personal finances won’t be at such a great risk from what happens with your business.

5. Lack of Tax Planning

Finally, remember that tax planning for your business might be different than tax planning for your personal finances. You can be hit with a large tax bill if you aren’t careful. Just as you work to reduce your tax liability in your personal finances, you also need to make sure you are on top of your business taxes. You can save a lot of money--and keep your business afloat for longer--when you pay attention to taxes and take steps to legally reduce what you owe.

There’s no reason to be one of the businesses that fail, at least when it comes to financial moves. Plan your business finances carefully to avoid the worst mistakes, and you’ll have a better chance of long-term success.