Poor financial management is one of the main reasons small businesses fail; 82% of business failures are because of cash flow problems, according to a study by Jessie Hagen for U.S. Bank. To help small business owners keep their finances in order, we asked YEC members to share financial pitfalls to avoid.
From avoiding impulsive spending without clear ROI projections to the necessity of regular financial reviews and strategic reinvestment of profits, these tips underscore the need for meticulous financial management by business owners.
What’s one financial mistake you should avoid as a business owner if you want to ensure your finances stay on track this year, and why?
Impulsive Spending
Avoid impulsive spending without clear ROI projections. As a business owner, it's crucial to evaluate every investment for its long-term value and ensure it aligns with sustainable growth goals. Regular financial reviews are essential to maintain stability and avoid depleting resources. —Anna Anisin, DataScience Salon
Not Accounting for One-Off Expenses
Don't forget one-off expenses which occur every year: Christmas bonus allocations, taxes, regular event sponsorships, or travel expenses. Many business owners tend to focus on monthly P&L fees without considering the cost of running a business on an annual basis. —Mario Peshev, DevriX
Not Monitoring Finances Regularly
One mistake to avoid as a business owner is neglecting regular and detailed financial monitoring and analysis. Monitoring and analyzing your finances regularly helps identify financial issues early on, such as cash flow challenges, declining profitability, or unexpected expenses, so you can take care of your finances before things get out of hand. —Josh Kohlbach, Wholesale Suite
Not Comparing Your Budget to Actual Expenses
Business owners should compare their expense budget to actual expenses at more frequent intervals to help keep finances on track. This helps identify where you're overspending so you can intervene before those expenses derail your finances. It also helps establish accountability with team members and provides a sense of ownership over departmental budgets and expense reporting. —Jared Weitz, United Capital Source Inc.
Not Reinvesting Profits
Reinvesting profits is a strategic choice and a necessity for maintaining competitiveness, adapting to change, and ensuring long-term financial success. By strategically allocating funds to growth and expansion areas, efficiency, and sustainability, you foster innovation and support tech, quality team members, and infrastructure—all fundamental ingredients to ongoing success. —Omri Bojko, TVP NYC
Failure to Budget
To ensure that your finances stay on track throughout the year, one mistake that you should avoid is poor financial management, including not keeping track of your expenses, not creating a budget, and not having a clear understanding of your cash flow. Be sure to set up a budget, track expenses, and regularly review financial reports to improve your business’s financial health. —Eddie Lou, CodaPet
Ignoring Numbers When Things Are Going Well
It's easy to take your eye off the ball and ease up on reviewing numbers when cash is flowing, but it's important to be constantly in tune with the metrics that are most relevant to you. If you aren't measuring it, you can't improve it. Expenses should always be managed and revenues should always be reviewed, no matter how the company is doing. —Joel Mathew, Fortress Consulting
Overplanning
One mistake business owners make when managing their finances is they try to plan down to the exact cent. Despite your best efforts, things are probably going to cost more than you expect. My advice is to have a secondary account that you store money in each month. Use this extra cash to take care of unforeseen costs, and you'll have a better chance of keeping your finances on track. —John Turner, SeedProd
Paying for Software You Are Not Using
Avoid paying for software that you are not using or not using effectively. A proper software audit is mandatory annually; this goes beyond simply not renewing software you are not using. Some software may have updates that could eliminate the need for other software, so having a thorough grasp of the road map of all of your software and any recent updates is necessary. —Matthew Capala, Alphametic
Not Tracking Your Inventory and Receivables
If your goal is to keep your finances on track, you need to have a firm handle on your inventory and other receivables. Overstocking typically means losing out on money because you'll need to sell at a discount to make space for new products. I suggest reviewing your inventory sheet on a weekly basis and comparing it to what you use. This one simple step can save you thousands of dollars annually. —Chris Christoff, MonsterInsights
Lax Invoicing and Billing
A bad financial habit that can hurt your business really quickly is lax invoicing and billing practices. Not staying on top of invoicing can eat away at cash flow fast. This makes it difficult to take on new orders, purchase supplies, and meet payroll, for example. Create and stick to an invoicing and billing schedule, and have a plan for how you will reach out to clients when payments are late. —Blair Thomas, eMerchantBroker
