If you have your own small business, you’re probably already pretty busy. There’s a lot to manage, including developing products or services, keeping customers happy, and hiring the help you need. And on top of all that, you also need to manage your company’s finances.
The financial side is arguably the most important part of operating a successful business. There are several mistakes many entrepreneurs make here. By knowing what they are, you can make sure financial mismanagement doesn’t sink your small business.
Mixing personal and business expenses
When you’re paying for business expenses out of your own pocket, you might be tempted to just put them on your personal credit cards. Or maybe you’re shopping for office supplies, but then you also decide to grab a new keyboard for your personal computer while you’re there, and you pay for them all in one transaction.
These are examples of mixing personal and business expenses, also known as commingling. While it may seem harmless, it can cause serious issues for your business later. Here are some of the potential consequences:
- It’ll be harder to file taxes for your business. When you have business credit cards and bank accounts, they help keep all your business expenses organized. If you use the same card to pay for personal and business expenses, it takes more time to sort through transactions and find tax deductions.
- You could have trouble calculating profitability. Without separation between business and personal expenses, it’s harder to keep track of your business’s financial health.
- It may impact your ability to get financing for your business. If you decide to apply for a business loan or seek outside investors, you’ll likely need to provide financial records. It won’t reflect well on you if you’ve been commingling expenses.
Make sure to open a business credit card and business bank account. It doesn’t take long, and it will save you a lot of time and trouble later.
Cash flow mismanagement
Cash flow is the money coming into your business versus the money going out. It’s a common cause of businesses going under — a U.S. Bank study found that 82% of small business failures are because of cash flow problems.
The biggest cash flow problem is spending more than your business makes. Now, this is normal in the early stages. You’ll incur expenses to get your business off the ground, and it will take time to build your business’s income.
But you should have a business plan with an estimate of when you’ll be cash-flow positive (when your business earns more than it spends). This varies by business, but three to four years is common.
Another way entrepreneurs mismanage cash flow is by not keeping track of income in relation to payment due dates. Then, they may have bills due before the income needed to pay those bills has hit the account. You could end up incurring late fees, overdraft fees, or both.
Not planning for taxes
Taxes get much more complicated when you’re a small business owner compared to when you’re an employee. You’ll need to pay self-employment taxes, since these aren’t being withheld from your paycheck anymore. You may also need to file a tax return for your business, depending on the business structure you choose.
If you used to wait until April every year to handle your taxes, that’s not a good idea anymore. It’s better to keep track of tax deductions throughout the year. This is easier than going back and looking for them later, and you’re less likely to forget about deductions.
In addition, you’re required to make estimated tax payments every quarter. If you don’t, the IRS can charge you an underpayment penalty and interest on the amount you owe.
Consider hiring an accountant who has experience with small business taxes. While you could handle your taxes on your own, it’s often worth the money to hire a professional. It will save you time and make it more likely that your return is done correctly. Plus, an accountant could find tax savings that you might’ve missed.
Running a successful small business
Every entrepreneur wants to give their small business the best chance of success. Keeping personal and business expenses separate, managing cash flow well, and tax planning are all a must, so your business will be in good financial shape.
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