Passion is the reason many business owners pursue an industry. You like the work. It interests you, and it can be anything:
- Sales
- Services
- Operations
- Trade skill
Passion can carry you a long way; however, if you’re not trained in finance, creating the planning structure to reach profitability is much harder.
I have seen a lot of financial mistakes over the years of working with business owners. Here are a few of the ones that pop up most often.
1. Starting Without Enough Capital
Launching your business takes money. You’ll have startup costs that include office space, storefronts, hiring staff, purchasing equipment, (potentially) licenses and permits, and other costs that are easy to underestimate.
Here’s a personal story for you.
I had one client in the cookie business who sold cookies and snacks – you know, all of the goodies that people love to eat. They had:
- A great business plan
- Rental space
Everything on the outside looked good, but I had a gut feeling that they had set aside too little money. He (the client) thought it was fine. Costs came in double what he was expecting, and this ate into the company’s capital.
Businesses take off sometimes, and other times, growth is slow.
It’s unfortunate, but the client had to close down within 6 to 9 months of opening. They had such impressive plans, and if they had enough money set aside, I think they would have been successful.
Plan, and wait, until you have enough money that you don’t have to worry about:
- Putting things on your credit cards
- Paying payroll taxes
- Falling behind on your bills
It’s hard to dig yourself and your business out of a financial hole. Set aside more capital than you think is necessary so that you have some breathing room if things don’t go right.
You can use the Small Business Administration’s calculator to better plan out your startup costs.
2. Skipping a Spending Plan or Proper Budgeting
One of the most common financial mistakes is avoiding your spending plan. You might not even have a plan, which means you’re just going with the flow. Sure, there are a few stories of businesses that make it despite all of the odds.
Apple lost $1 billion despite recording $7 billion in revenue and almost went bankrupt. If you ignore this fact, you see one of the most successful brands in the world.
Sales weren’t where the company needed them to be, and this is what happens to a lot of small businesses.
You need multiple scenarios:
- Baseline budgets where things are normal
- Worst-case scenarios, revenue misses expectations
- Best-case scenarios where you beat all expectations
Ignoring the best-case scenario, you’ll need to make drastic changes to meet your spending plan. Steve Jobs cut back on 70% of the company’s product line to restore the company’s ability to invest money in other areas.
Plans also help you eliminate spur-of-the-moment purchases because business may be good today and slow to a crawl tomorrow.
Hope is not a strategy. You need to take emotions out of the equation and follow a solid plan to avoid overspending and stay grounded in your decisions. Year-end planning is a good place to begin.
3. Putting Accounting on the Back Burner
Accounting is “just an expense,” right? Business owners may have a background in sales and marketing, but they devalue the bookkeeping and accounting team that can really add value to their business as a whole.
But a good accountant can do so much more than just navigate ever-changing tax laws.
Business owners want to make money. Sales rise, and they’re happy. But many owners lack the financial information to focus on:
- Pricing
- Understanding margins
- Smarter decision-making
An accountant can help you plan for the future, not just focus on your past financials. They’re an investment, not just an expense.
4. Devaluing Their CPA
CPAs are more than tax preparers. A good CPA is a sounding board that can help you evaluate business decisions, analyze your finances and fill in the financial gaps that you likely have if there’s not an in-house accountant on payroll.
Your CPA can:
- Analyze your business
- Dissect your profit margins
- Address low profit margins
- Focus on maximizing cash flow
A CPA can minimize taxes, offer planning services and guide a business to success. But you need professionals who provide this level of service, and they are not the cheapest.
What many companies overlook when paying the cheapest accountants is that they miss out on the perks of lower taxes and advisory services that paying a little more offers.
5. Avoiding Financial Conversations Because of Ego
I have heard from too many business owners over the years that they feel “dumb” when talking to their accountant. You’re running a business and in charge, but that doesn’t mean you shouldn’t lean on financial professionals to assist you.
At our firm, we focus on meeting you “where you’re at.” We don’t ever want anyone to feel dumb. We keep things simple and easy for you to understanding.
For example, I had one client who was selling her business.
It sounds simple, but she also needed to pay a tax to do this, which is more technical than it ought to be. What I did was break down the requirements in plain English, which gave her:
- Clarity
- Confidence
I wanted her to feel comfortable with her decision. She doesn’t have a background in finance, but breaking everything down into simple terms made her confident, not confused.
Your accountant should make you feel confident and guide you in the right direction.
Otherwise, one of the financial mistakes you might be making is staying with a financial professional who could do more to assist you and your business.
Final Thoughts
Growing a business means being intentional with your finances. You have to plan out your cash flow, spend money responsibly and work with professionals who are in it for the long term. Financial partners will help you fuel growth with the confidence you need to reach your goals.
Working on avoiding the financial mistakes above is a good first start, and if you’ve gotten this far, you’ve taken your first step.
Contact us to take your second step in planning for your business’s future.