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Common Financial Mistakes Small Businesses Make: Tips to Avoid Them

It’s time to organize your small business’s finances — but where do you even begin? If you don’t have a degree in finance or accounting, the task can seem daunting. Luckily, millions of entrepreneurs have walked this path before, and most common mistakes can be easily avoided with a little bit of awareness. Empower yourself with these small business tips to set your business up for longevity.

Mistake #1: Ignoring the Importance of a Comprehensive Business Plan

Before your company comes to full fruition, it should start with a detailed business plan. Without one, you may struggle to create and achieve actionable goals that are crucial for healthy business growth. Remember to include at least the following in your plan:

    • Executive summary
    • Company description
    • Market analysis
    • Organization and management structure
    • Services and products
    • Marketing and sales strategy
    • Financial projections and data
    • Supporting documents
    • Appendix

Mistake #2: Forgetting to Choose a Legal Structure

Another big step for your blossoming new business is legitimizing it with the state. Not only does this protect your personal liability and add professionalism and credibility, it could also lead to potential tax savings depending on what entity type you choose. Here are your options:

    • Limited Liability Corporation (LLC): The simplest of business structures, LLCs can be run by a sole owner or a partnership. It requires less paperwork than C and S Corporations but still provides personal protection.
    • C Corporation: Better suited for large companies, these more complex businesses are subject to double taxation and are run by a board of directors separate from ownership.
    • S Corporation: Slightly less complex than C Corporations, S Corporations are not subject to double taxation, and they allow flexibility and transfer of ownership.
    • Nonprofit: Profits from these businesses must go to a specific goal or cause or be used to cover business expenses such as overhead and payroll.

Note that if you don’t register your business, you’ll automatically be recognized as a sole proprietorship or partnership. We don’t recommend this entity as it doesn’t offer the same legal protections as the options above.

Mistake #3: Keeping Personal and Business Funds Combined

One of the first tasks on your startup to-do list should be opening a business bank account. This top small business tip will help you keep business and personal funds separate for two reasons. First, it’ll make expense tracking easier when making a budget or doing taxes. Second, it will keep your personal finances healthy by ensuring you’re not losing money to your new business.

The bank will need to see your Employer Identification Number (EIN), which you can request for free from the IRS, and your official business entity registration with the state. They may also need to see a business license, so be sure to check your city and state’s licenscing requirements. From there, either go to a bank branch or apply online, and your bank account can be up and running within a day.

Mistake #4: Failing to Save for Emergencies

If we’ve learned anything from the past few years, it’s that nothing is predictable. No matter how ship-shape your business is, outside factors can always cause a ripple effect that may be damaging to your business — that is, unless you have a solid emergency fund.

When you create your business bank account, make a checking account for everyday expenses and a savings account for an emergency cushion. Contribute vigorously to this in your first few years — typically 20%–30% of profits if you’re able — so you have peace of mind once you’re well-established.

Mistake #5: Neglecting Important Tax Requirements

Your tax obligations will vary depending on your legal entity type and the state in which you do business. You’ll need to read up on what’s expected or consult your accountant. Mark your calendar for important deadlines, and make sure you’re taking care of the following requirements:

    • Obtain an EIN, if you’re hiring employees or have a corporation.
    • Submit an annual report with your state.
    • File quarterly income and self-employment taxes.
    • File sales tax at the appropriate intervals based on your state.

Failure to comply with tax regulations could result in penalties, fines, and loss of recognition as a legitimate business by the state (otherwise known as your Certificate of Good Standing).

Mistake #6: Spending Too Much Too Early

Many businesses hit the ground running with the concept that “you have to spend money to make money.” And while this is true in many circumstances, there are caveats.

Your business should never spend so much that it accrues significant debt with no plan for repayment. Before investing in expensive machinery or ordering a surplus of inventory, make sure you have a plan to recoup your expenses.

This — among many other reasons — is why it’s so important to have a business budget.

Mistake # 7: Not Following a Budget

We won’t be the first to tell you that a budget is a crucial part of smart money management. Just like individuals and households, businesses need a budget to keep spending in check. Without a proper budget, turning a profit will be difficult — if not impossible. 

Remember to include both fixed and variable costs. Fixed costs are those that remain the same every month, like rent or software subscriptions. Variable costs can be tricker to budget since they may fluctuate, such as food costs for a restaurant. If you’re having trouble estimating variable costs, calculate what you’ve spent over the past six months and take the average to get a ballpark figure.

Mistake #8: Misunderstanding Write-Offs

Write-offs allow you to lower your taxable income by reporting qualifying expenses. When it comes to writing off business expenses, entrepreneurs commonly make one of two mistakes: thinking anything can be a write-off or not fully understanding and taking advantage of perfectly legitimate write-offs.

While there are many qualifying business write-offs, including (but not limited to) office expenses, insurance, marketing, education, childcare, and travel, not everything can be written off. The following are common expenses that you may not write off:

    • Gifts to clients (except the first $25)
    • Expenses related to your commute to and from the office
    • Penalties and fines, even if they’re business-related
    • Entertainment expenses for clients, such as hotel suites or cars

With a few exceptions, most other business-related expenses qualify as a write-off and will reduce your taxable income. If you’re ever unsure about qualifying expenses, consult your accountant.

Mistake #9: Forgoing Professional Accounting Services

Businesses fail when leaders feel like they have to take on everything by themselves. Sound familiar? It’s tempting to want to control every aspect of your passion project, but when it comes to financial best practices, there are huge benefits to hiring a professional.

Whether you choose a full-blown accountant to handle every aspect of money management or you opt for accounting software to help lighten your load, don’t forget to continually level up your financial literacy with continued learning. Set yourself up for financial success in the future by attending webinars, taking courses, reading books, and leaning on a business mentor for valuable lessons.

Mistake #10: Not Monitoring Marketing Campaign Results

Marketing is a big investment and especially important for launching a new small business. However, if you’re not consistently monitoring results and tweaking your strategy based on your marketing data, you may be wasting precious capital on campaigns that aren’t delivering results.

You don’t need to be a seasoned marketing professional to have a basic grasp on your campaign performance. Generally, a solid ROI ratio is 5:1 or better, meaning you make back at least five times what you invested. Anything less than 2:1 is poor performance and not worth your time. Once a month, review performance and reevaluate as needed.

Mistake #11: Skipping Your Salary

You probably feel passionate about your small business, which is a huge key to its success. However, many entrepreneurs have a tendency to put the financial well-being of their business above their own, thus neglecting to pay themselves a salary.

When a new business is just taking off, owners may be tempted to pinch every penny they can to achieve financial stability for their company. But if you neglect to pay yourself, you could cause unnecessary financial stress, which impacts your ability to run your business with strong, level-headed leadership.

Remember that no business is worth sacrificing your personal financial security. If you can’t afford to pay yourself and any employees fairly, it may be time to rethink your business structure.

Smart money management is never easy, especially for new small business owners. It takes experience, diligence, and attention to every last detail. The good news is there are affordable and professional financial services to help remove the financial stress so you can focus on doing what you do best — running your business.

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