According to the Small Business Association, one-third of small businesses fail within their first two years, and half don’t survive any longer than five years. Of course, there are many reasons why businesses fail, but poor money management is one of the most significant.
Often, entrepreneurs launch businesses having plenty of experience and expertise in their industry, but not necessarily well-versed in matters of finance and running a business. For example, a talented chef who’s spent 15 years working in kitchens who opens a restaurant is undoubtedly qualified to run her kitchen—but that’s very different from knowing how to run a business. And money management is one of the most difficult and crucial aspects.
As part of the process of starting and operating a business, it’s important to get acquainted with the all-too-common financial planning mistakes small business owners make. This awareness makes you much better prepared to avoid them and their potentially dire financial consequences.
Biggest Financial Planning Mistakes Small Business Owners Make
- Not separating business and personal finances and records. As a small business owner, you need to get into the mindset of having two separate money lives. And these require their own bank accounts, credit accounts, record keeping, etc.
- Not planning for tax liability. If you’re used to withholdings as an employee, you might not realize how much higher your tax bill is likely to be as a small business owner. Saving 25 percent of your income for taxes and/or paying quarterly federal and state taxes will prevent an unmanageable shock down the line.
- Not having an emergency fund. Unexpected costs can strike at any time. Business can drop drastically. So many variables can lead to a spike in expenses or loss of revenue, and being unprepared to weather these situations is a typical cause of excessive debt and a downhill spiral for small businesses. Ideally, you should have “rainy day” funds to cover at least 6 months of your personal and business expenses.
- Being too afraid of debt. Sure, being debt-free or having little debt feels great. And yes, bootstrapping and proactively managing costs are great. But if you’re perpetually running along at or near the red, you’re setting yourself up for disaster. On top of that, you’re not able to make smart investments into improving and growing your business. Sometimes, taking on strategic debt is an important step in the processes of surviving and becoming more successful.
- Ignoring the retirement plan. With so many other places to divert your revenue, it’s easy to let retirement planning and savings fall by the wayside. But this is a highly risky road to walk. Retirement planning is easiest and most successful the earlier you start, so include it in your financial planning as soon as possible.
- Tying up all money and assets in the business. You’ve heard the cliché about having all your eggs in one basket. One of the most common financial planning mistakes small business owners make is ending up with their ability to survive being 100 percent dependent on their enterprise. Diversify your investments and never stop developing alternative revenue streams.
- Upgrading your lifestyle as income increases. You work hard, and it’s tempting to start splurging when you begin to see the fruits of your labors. While you’re certainly entitled to enjoy your money, exercise caution. Have you already established an adequate emergency fund? Do you still have high-interest debt? These and other considerations will help avoid a bad financial situation should you make upgrades and suddenly face new expenses or a decrease in revenue.
