If you’re a small business owner, you’ve pulled off an absolutely Herculean task. You’ve struggled and sacrificed to create a thriving new business that’s set to last…two to five years. We wish we could say “set to last forever,” but around a third of new businesses close within their first two years and half close in their first five.
What sort of money mistakes would cause a business to shut down so quickly? We’ve compiled a list of the worst ones to avoid.
1. Going Uninsured
Going without health, car, home, or business insurance isn’t a problem…until you have a problem. You’d never cancel your car insurance without another policy in place, so don’t make that mistake with your business.
Never go without coverage, and take your time when finding liability services and insurance for your small business. You’ll be footing the bill if you don’t have enough coverage for liability claims, so you may want to consult with an insurance broker to make sure you’re purchasing the best policy.
2. Commingling Your Expenses
Things can get dicey if you start to commingle your personal and business expenses. If you have an LLC, C, or S corporation and your business goes bankrupt, you have a “corporate veil” of protection and are not held personally liable for any debt.
But if you’re getting careless and commingling expenses, you’re putting all of your personal assets on the line. (This one’s an especially ruinous financial mistake to make, so check out our previous blog post on commingling for everything you need to know!)
3. Being Frivolous
When starting a small business, you’ve got to buy stuff. In the beginning stages, though, be as lean as possible with your spending.
Choosing to pass on that $1,000 painting won’t make your office space any less inviting or comfortable for team members! Carefully consider where each dollar is going, and limit purchases to those that are 100% necessary.
4. Set up an emergency fund.
If you don’t have a rainy-day fund in place…you’re setting yourself up for failure. In life and business, expect the unexpected. Even the best-written budgets will miss some things, especially in times of economic hardship.
As a general rule of thumb, save for at least three months of business expenses. Don’t feel discouraged if this isn’t possible at first! Something is always better than nothing. Start saving what you can now to prepare yourself for any sudden costs. Better to have it and not need it than to need it and not have it!
5. Pricing Yourself Too Low
Protect your margins with higher prices. Especially if you’re the new kid on the block, it may be tempting to make your product stand out with cheaper pricing. This is where knowing your value comes in.
If your service is the best thing since sliced bread, price it accordingly and position your business as a high-value brand. When you price yourself fairly from the beginning, you’ll avoid extreme price hikes later that will alienate your first customers.
6. Not Collecting Unpaid Invoices
Your business is doomed if you can’t manage your cash flow. It’s never fun to play debt collector, but you’ve got to make sure you’re being paid for services rendered.
Keep careful watch over your records, and consider offering payment plans to customers before you sever ties. You might also offer incentives for early payment!
7. Taking Care of Yourself Last
Pay. Yourself. First. It’s not selfish! You’ve got to feed yourself and/or your family and you shouldn’t ever work for free. If you’re running yourself into the ground to keep your business afloat, you’re not going to have long-term success.
Ask yourself how much you’d pay for someone else to do your job, and don’t pay yourself a dime less than that amount! This business may be your passion project, but passion doesn’t pay the bills. Even if sales aren’t booming quite yet, you’re allowed to make yourself comfortable.
8. Being a Stingy Scrooge
That “pay yourself first” advice? It extends to your employees. Hiring and training new employees is expensive and time-intensive, so your primary focus should be employee retention.
Take the time to evaluate your compensation packages. Your team will become more invested in your mission if they’re financially taken care of. Some package elements to consider aside from pay:
- More PTO
- Reimbursement for adoption expenses
- Covering domestic partners under health benefits
- In-office perks like fitness centers and free food
If you prioritize integrity and generosity over profits, you’ll avoid talent shortages and see results faster.
9. Not Hiring an Accountant
Taking care of your finances yourself can save you some cash at first, but messing up tax documentation can be an extremely costly mistake. Without professional help, you could be underpaying on your taxes (yikes!) or missing out on the deductions you’re entitled to.
In addition to helping you prepare for tax season, an experienced CPA will look at the big picture of your financial wellbeing. They might offer their expertise to:
- Point out potential issues or opportunities for growth
- Keep an eye on any gains or losses
- Prepare reports in the event of an audit
- Help you apply for financing
A great CPA will be able to provide valuable guidance to set your small business up for financial success. For tips on picking the perfect accountant for your small business, check out our recent blog post.
It’s never too late to pivot your business!
Successfully avoiding these nine finance mistakes will give you a head start on your dreams of small business longevity. And if some of these seem tough to avoid, don’t throw your hands in the air just yet! If you happen to be guilty of a mistake or two, it doesn’t mean you’re destined to fail. Most business closures are the result of multiple errors over a period of time.
That’s why it's smart to start small, and hire a trustworthy financial expert to dodge the other million mistakes you could make. Reach out to KYN today to connect with our team of dependable CPAs. We’ll help get your small business on the right track!