Everyone makes mistakes. Whether you’re a startup company, business that has been around for decades or a small business that falls somewhere in the middle, nobody is immune to errors.
With that said, some mistakes are more significant than others. Not turning the lights off when you close for the night isn’t nearly as bad as forgetting to pay an invoice.
While most faults are easy to fix or recover from, financial mistakes can be the most detrimental to a small business.
Most of these mistakes can be traced back to the accounting department or small business bookkeeping practices.
1. Mismanaging Cash
It sounds obvious; your business needs cash to stay alive. Yet, so many business owners lose sight of this simple concept.
In fact, 82% of small businesses fail due to poor cash flow management.
Sales can be deceiving. Revenue is just one component of managing cash flow. You’ll also need to keep track of the money going out.
Operating at a negative cash flow is a dangerous practice for small businesses. All it takes is one client with high pending receivables to throw your entire system off balance. If you’re relying on one or two invoices to make ends meet, it’s not a good sign.
In addition to operating at a positive cash flow, you should also keep plenty of cash reserves on hand in case of an emergency. Otherwise, an unexpected expense could put you out of business.
2. Inaccurate Recordkeeping
Recordkeeping is a tedious task for small business owners.
With so many other things to focus on, taking the time to record transactions and organize receipts can fall by the wayside. Papers get thrown into the proverbial shoebox until you get around to it.
But before you know it, weeks or potentially months have passed.
Credit card receipts have been mixed in with supplier invoices, maintenance bills, utilities, insurance, and other pieces of mail. Your business travel receipts are shoved into the glove box in your car or briefcase.
Once you sit down to enter this information into your accounting software, you’re wasting even more time trying to remember what each receipt was for. Plus, think of all the paperwork that didn’t make it into the “shoebox.”
These scenarios lead to inaccurate bookkeeping, which will create even more problems down the road.
3. Not Creating a Budget
Whether you’re a sole proprietor or small business owner running multiple stores with dozens of employees, everyone needs a budget.
Without a budget, you can’t accurately determine what your business can afford.
Your budget might not stop you from buying pens, paper, or ink at Staples, but what about more significant decisions?
How much can you afford to run on marketing campaigns for the upcoming year? Do you have the funds to hire a consultant or hire new employees?
Some small business owners create a budget but fail to follow it. This is just as bad, if not worse, than not creating a budget at all.
4. No Pricing Strategy
I’ve seen lots of small businesses struggle because their prices are too low.
The pricing of your products and services is crucial to your success. Even if your sales numbers are phenomenal, you could still be losing money if you pulled prices out of thin air.
Many small business owners make the mistake of mirroring their competitors to come up with prices. They set prices either at or just below the competition to draw customers.
However, your competitors’ prices are irrelevant to your company’s profit margins.
Before you set prices, you need to need to know your breakeven point for each product or service that you’re offering. This number must include all your overhead and operating expenses, including employee wages.
Then you’ll have to markup those prices to ensure the profit margins are substantial enough.
Higher prices may result in fewer transactions. But at least your sales will be profitable.
5. Expanding Too Quickly
Entrepreneurs are always thinking one step ahead. Small business owners tend to have the “sky is the limit” mentality, which is why they took the risk of starting a business in the first place.
However, scaling too quickly is a fast way to go bankrupt.
As soon as you see early signs of success, it doesn’t mean you should immediately start hiring new workers, upgrading your computer systems, or starting new locations.
Business expansions increase overhead costs and reduce your cash flow. A long-term obligation like a new lease could be hard to cover if you run into cash flow problems.
Sometimes, not expanding at all is more profitable than growing too quickly.
For those of you who are experiencing rapid growth and considering an expansion, it’s a sign that your small business needs a CFO.
6. Doing It All Alone
Relinquishing control of tasks and other processes can be difficult for small business owners. But your business can’t scale if you try to do everything on your own.
When you’re first starting out, it’s OK to manage certain things by yourself. But as time passes, you’ll need to start delegating responsibilities to qualified candidates.
Don’t worry; you’ll still have complete control and authority over the operation.
Sometimes business owners try to do everything on their own because they think it’s too expensive to hire employees. While an in-house full-time hire can be pricey, outsourcing tasks is much more cost-effective.
Consider working with an outsourced bookkeeping service. Review the common outsourced CFO services to see if a part-time CFO is right for you.
7. Mixing Personal and Business Accounts
Even if you’re a freelancer or sole proprietor, you should establish a separate business checking, savings, and credit card account from day one.
For larger organizations, mixing personal and business accounts can result in tax consequences or penalties. The IRS has strict rules about using business funds for personal use.
Mixing your personal and business accounts can also create inaccuracies or discrepancies in your books. For example, let’s say you used a personal credit card for a large business expense. This could make your business appear to be more financially healthy than it is. The liability for the purchase won’t show up on the business records, which is deceiving.
8. Failing to Plan for Tax Obligations
Depending on your business type, you’ll have different state and federal tax obligations.
For example, self-employed individuals are responsible for making quarterly estimated payments throughout the year. This is another reason why you should have a separate business bank account.
If you don’t prepare for your tax liabilities, you could be stuck with a substantial amount of money owed when it’s time to file your taxes. You might owe under-withholding penalties, or worse, not have enough money in the bank to cover what you owe in taxes.
As a small business owner, you’re going to make your fair share of mistakes. It happens to everyone.
But financial mistakes can sometimes be insurmountable.
If you establish bookkeeping processes from the beginning, it will be much easier to avoid the financial pitfalls on this list. For some of you, it might be time to hire a part-time CFO.
An outsourced CFO can help oversee your finances and guide you through an expansion. CFOs are masterful at analyzing data related to cash flow, budgets, and forecasting as well.