Financial Mistakes That Can Hurt Your Business

Business owners are typically intelligent people who make informed decisions for their businesses based on the information and guidance they receive from other experts. However, mistakes are still possible even with the best processes in place.

Unfortunately, financial mistakes can have significant repercussions, and rectifying them can often be complicated. However, when you’re aware of the most common financial mistakes, some of which are listed below, you might be in a much better position to avoid making them yourself.

Not Consulting Experts for Financial Agreements

Whether you’re reading through a bank document, an insurance policy, or a mortgage application, you’ll likely encounter financial language that doesn’t make sense to you. It’s easy to assume that the terms and conditions of your agreement are standard and don’t require your attention, but that’s not always the case.

Alongside enlisting a commercial lawyer’s services to ensure a financial agreement is in your best interests, hiring a financial translator can also be worthwhile. Financial translators provide financial translation services to ensure you understand all financial concepts relevant to your business. With their assistance, you might pick up mistakes or clauses that could have had significant repercussions for you and your team at a later date.

Not Budgeting

When business owners launch their small business for the first time, they typically use their own money and, sometimes, a business loan. You can easily determine your initial expenses and how much you need to earn to cover your related costs.

This straightforward approach sometimes means that business owners don’t set budgets for their businesses. As their business grows and accumulates more costs, it can become harder to know whether you’re on the right financial track and whether your business is profitable or not.

Budgeting can be crucial for success, so make a business budget your priority early on. Fortunately, even the most inexperienced owners can establish one by taking the following steps:

1. Analyzing your business costs
2. Negotiating costs with suppliers
3. Estimating your revenue
4. Learning your gross profit margin
5. Projecting your cash flow – customer and vendor payments
6. Setting spending goals

If you’re unsure how to find this financial information, enlist the services of an accountant or start exploring financial software.

Making Too Many Large Purchases

New businesses must make many significant purchases to establish themselves and offer their customers exceptional products and services. Vehicles, equipment, premises, and stock, are just a few of the many things you’ll likely need to buy during your early days in business.

However, many business owners make the mistake of buying too much in a short period, putting themselves at risk of financial strife if they can’t cover the repayments or don’t leave enough cash in the business.

While it can be important to make big purchases, consider whether you can spread them out over a longer period to avoid putting too much financial pressure on your business. Think about buying used equipment or leasing vehicles and machinery you need until you’re in a more stable position with better cash flow.

Not Shopping Around for Lending

Many businesses request loans to address funding shortfalls and ensure they can continue providing products and services for their customers. However, as desperate as you are for additional cash, don’t let your desperation cause you to make the wrong borrowing decisions.

Shop around with different lenders to try to secure the best lending rates and pay close attention to the repayment terms. Even a few percentage points difference in loans can sometimes result in businesses paying thousands of dollars more or less, depending on whether they managed to secure the most competitive rates.    

Forgetting About Legal Structures

You might assume that you can jump right into doing business without confirming your business structure, but it’s important for you to focus on this detail early on. Without setting your own business structure, it can be considered a sole proprietorship by default, which can present many problems as you start setting your business up.

Sole proprietorship means your own social security number and name will be used on business documents, and it can also be harder to get business funding. You’re also responsible for any legal issues your business faces, as well as its debts. According to the IRS, businesses can choose from many different structures when establishing their business:

• Sole proprietorship
• Partnership
• Corporation
• S Corporation
• Limited liability company (LLC)

Each structure has pros and cons, so consider talking to a business expert to ensure you choose the most appropriate structure for your current and future needs.

Purchasing Too Much Inventory

There have been significant shipping delays worldwide since the COVID-19 pandemic, meaning many businesses have been purchasing goods in bulk to avoid running out of something their customers need in a hurry. Sometimes, business owners also buy goods in bulk when they’re offered a good deal, ensuring a better profit margin.

While there’s typically no harm in purchasing goods in bulk when you know they’ll be sold quickly, there’s always a chance you’ll end up with too much inventory on hand. The costs associated with having this in your business can be huge, so you might need to decide whether you’re able to cover the costs of keeping it or need to come up with a plan to liquidate it.  

Mixing Business Accounts With Personal Accounts

Small businesses can start so small that their owners don’t see the need to separate their finances. You might only have a few customers, and the money you earn from them goes right into replacing the goods you used or covering your personal costs.

However, as your business starts to grow, the lines of business and personal can become blurred. You might also encounter problems like cash flow issues, accounts that don’t balance, and inaccuracies with filing taxes and measuring profits.

Separate your accounts as soon as you start taking on customers and officially launching your business. You can then direct all expenses out of your business account and income into it and pay yourself a wage or drawings into your personal account.

Every business owner wants their business to succeed, but it’s never guaranteed. Fortunately, you might be in a much better position to experience financial success by doing your best to avoid the mistakes above.