For a small business owner, getting your finances right is crucial for success. In fact, 50% of small businesses fail within their first 5 years due to obvious financial mistakes. You don’t want to be a part of this percentage, do you?
To help small businesses flourish with exceptional financial planning, we’ve put together a list of 5 financial mistakes small business owners make and how you can avoid them.
1. Forgetting to stay ahead of tax liability
Taxes, the dreaded taxes. For those employed working in full-time jobs, taxes are straight forward. Your taxes are deducted from your monthly pay checks, no need to worry, simple. But for small business owners, taxes can become a little trickier. Once you start receiving payments from clients/customers, you’re now solely responsible for tax liability.
If you’re a small business owner with an online invoicing system set up, accounting can still feel straightforward. But as your business grows, it’s easy to get caught up in day-to-day management tasks, neglecting tax responsibilities until the deadline hits you.
For the easiest and most efficient way to stay ahead of your taxes, make sure you do things right from the very beginning. Hiring a professional accountant to help set up accounting processes will ensure you’re prepared for the future. Don’t fall into the trap of leaving it to the last minute.
2. Using personal financial accounts for business
There are no benefits to mixing your personal and business finances, it will only blur the lines and cause confusion for you. You must keep your finances separate to ensure clarity in your finances.
Yes, it may be easier and more convenient for you, but creating separate savings, checking, and credit card accounts for your business will make accounting much easier. Not only this but having separate bank and credit accounts will allow for a more accurate picture of your business’ financial position.
An important point to note: Having separate accounts will also protect your personal credit score if your business falls into an unfortunate position in the future.
When looking at this from a psychological point of view, separating your personal and business’ finances will go along way. Every pound your business earns shouldn’t go directly to you. You should be investing it back into your business to help grow your company and build a stronger future for yourself.
3. Not monitoring business credit score
If you’ve followed our advice from the above point, you’ll have a separate financial account for your business, and therefore a separate credit score. This number tells the story of your business’ history with debt. Many things are taken into consideration when generating this score including, your payments history, length of history, debt utilisation ratio and more.
As your business grows, this number becomes increasingly important. Not only will it help you in the future with things like securing financing, but it’s a public record too. If you’ve requested an extension on your trade credit from another business for example, they could decline your application if your business credit score is low.
To help improve your business credit score you should:
- Pay your bills on time
- Decrease your credit utilisation ratio
- Establish credit accounts with suppliers
- Dispute any errors and inquiries
- Check your credit report
4. Being unprepared for tough times
Unfortunately, many small business owners put off opening a savings account because their budget is so tight. But without any savings, what can you fall back on if times get tough?
To ensure you have an emergency fund, you should build savings into your budget. If you treat savings like another monthly expense, you can slowly but surely build a reserve that could help your business stay afloat in an emergency. Furthermore, an account like this could help your business in the long run. If an opportunity strikes to launch something new, expand, or even buy out one of your competitors, having a savings may allow you to do this.
But how much should you save in an emergency savings account? We advise small businesses to aim towards saving six months’ worth of operating expenses.
5. Not keeping a close eye on cash flow
As a small business owner, monitoring your cash flow closely is crucial. Your business depends on the way your money is flowing. If you fail to monitor your cash flow, you could find yourself falling into a deep hole.
If you take a step back, cash flow is simple. It’s just the movement of money in and out of your business. If more money is coming in from the sale of services/products than expenses you’re paying out, you’ve got a ‘positive cash flow’. But turn it around, a negative cash flow will lead to issues if not monitored and tackled appropriately.
To discover all things cash flow, take a look at one of our recent blogs, a guide to small business cash flow.
Avoid financial mistakes with small business accountants
There are several steps you can take to avoid the financial mistakes mentioned above. However, this eats away at your time managing the business, and with one single mistake, you could cause huge issues for your business.
By hiring a qualified accountant to take care of your finances, you can free up time, and ensure your business is financially healthy. If you’re looking for a small business accountant to help you, contact HL&W today. We’ll take your financial tasks into our own hands and help manage cash flow, budgeting, forecasting and more. Book your free meeting today.