The Worst financial Mistakes Made by Small Business Owners

 

When you are starting out, you may make some financial Mistakes in your business.

But it's important to keep in mind that the choices you make today and the habits you form now can affect the rest of your financial life.

Small Business Owners want to search for the opportunity to cross the frontiers and find out about the sectors they care for. They are good problem solvers, challenge their known bounds, cross borders, and sail to unspecified waters. This risk-taking tendency derives from a distorted understanding of the contractor that sometimes equates risk and chance.

There are small failures and errors that can be resolved on fly. But some in particular will burn down the house quickly. This is a huge reason why many Small businesses struggle in their first few years. All of which is understood to have brought to their knees even the most ambitious young companies a flux that unexpectedly drowns, an enormous unforeseen cost and a fast accumulation of debt.

The key to your success is to quickly identify your mistakes, learn from them, and prevent the same mistakes from happening again, says Mike Michalowicz, small business expert and author of “The Toilet Paper Entrepreneur.” Most Business Owners have the same problem. These are the errors that could make the difference between owning a successful and viable small business or having a money pit that could leave you suffering in future years.

Try to get rich quickly can take15 to 20 years for a night to be effective. You can be frightened early on, because you hope to be wealthy immediately, and unnecessarily give up. It takes patience, persistence and a bit of chance to know your achievement. Allow time to build with your business. You must just take this for a hint that you ought to do something different as your business stagnates for a long time.

So, what are the biggest mistakes owners make when starting and managing their small businesses?

Carrying too much debt

Credit cards and car loans can be a drag on your monthly income along with a mortgage or college credit debt. The bigger your mortgage, the higher your interest cost. You will find yourself paying the living paycheck if these fixed costs are a big part of the spending. Often this results from attempting to "maintain the Joneses." You can have to use extra debt just to get through. Worse yet, you do not have a retirement or other financial savings bed.

To avoid excessive debt, start by tracking your expenses and living below your means. Don't use a credit card if you can't pay off the balance in full each month. These habits will help you for the rest of your life, and your future self will thank you for it.

Not saving for retirement early

The sooner you start investing, the more time your money will have to grow. A survey by Bankrate found that just over half of Americans say their biggest regret is not saving enough. Saving for retirement was the most commonly cited regret. You may believe that retirement is far away and you can save later. Before you know it, you're in your 40s or 50s and retirement is just around the corner. If you haven't developed the habit of saving early in your career, it's hard to adjust your lifestyle down the road.

Not Budgeting

When you do not have a budget, you do not have control of your finances. Failing to budget month after month means that you are not taking control of your financial situation.

Without a budget, you can make decent money and still struggle to get by . It can be difficult to reach your financial goals when you do not have a solid budget in place. Take the time now to set up a budget , and continue to do it every month.

You can begin to make better financial decisions if you are budgeting and you know exactly where your money is going each month.

Ignoring your credit score

Keeping your credit healthy is a balancing act and neglecting it is a mistake that's made too often. It's up to you to catch mistakes with your credit score or report, and chances are a mistake might pop up from time to time.

For reference, in 2016, 74% of the consumer complaints made to the Consumer Financial Protection Bureau (CFPB) were regarding incorrect information on a credit report.

How to fix it: Once you start building credit, don't forget to monitor your score. Learn what negatively and positively affects it and adjust your finances and debt accordingly (if you can), and make sure your credit score is correct so you can reap the best benefits from it as possible.

Thinking you don't need credit

Some people view having credit as unnecessary, and those people are wrong. A good credit score can help you snag that dream apartment or an amazing rate on your mortgage, and a bad score can keep you from a lot of your financial and life goals. Don't let this happen to you!

How to fix it: First of all, if you don't have credit, start building it. A low limit credit card or a small personal loan that you can pay back quickly are both good places to start establishing and building credit. Also, putting household bills like electric and gas in your name can build credit.

Not taking advantage of free money

A second saving mistake you might be making is not taking advantage of free money. There's two different ways you can make this mistake: you don't shop around for the best savings account interest rates for your needs, or you don't take advantage of your employer's 401(k) or other retirement plan match.

How to fix it: Look into the savings account options your financial institution offers and make sure you meet the balance and transaction requirements so you get paid dividends on your account.

You can also shop around for the best rates or products if you aren't 100% happy with what your current financial institution offers. You might get a better rate with a certificate of deposit than a traditional savings account, but you'll have to be willing to lock your money down for awhile.

Also, if your employer offers a match on retirement plan contributions, make sure to contribute at least enough to secure that match. If you can contribute even more, that's a plus.

Not Having a Business Plan

business plan evaluates the market for your product or service and the competition you'll face. It looks at the amount of money you'll need to get started and run your business and the income you can expect to make.

Putting together a business plan takes some work, and there's a chance that you'll discover that your great business idea isn't so great after all. Because of this, a small business owner sometimes jumps right in without a plan and then wonders why things didn't work out the way he imagined.

Not Having a Marketing Plan

marketing plan goes hand-in-hand with your business plan. After all, you can't expect to make any money if no one knows about your business. As part of your marketing plan, you'll identify your ideal customer and figure out the best way to appeal to that customer and differentiate yourself from your competition. And you'll establish ways to measure your success so you can change course if something isn't working.

Without a marketing plan, you're apt to waste time and money on a scattershot approach that doesn't do much to bring in business.

Mixing Business and Personal Finances

You know how mixing business and pleasure never really works out in the movies or on TV? It's not such a good idea in the business world either.

According to small business funding app Fundbox : “If your business is a corporation, it's considered a separate entity and finances must be completely separate to maintain the corporate shield that protects your personal assets. If you have structured your business as a sole proprietorship, the business is not a separate entity: You are entitled to all its profits and are also responsible for all of its debts, losses and liabilities. Still, business and personal finances should be separated because, in the event of an audit, the burden of proof is on you to prove your business expenses and income.”

Poor Recordkeeping

Effectively documenting expenses and deductions requires a proper recordkeeping process. While you may strive to become paperless, going digital doesn't mean ditching hard copies, especially if you're ever audited . Note: The IRS recommendations vary depending on the kind of receipts filed.

SlideShare from IRS Webinar delucia + co also recommends that small businesses reconcile their accounting statements on a regular basis. “Not reconciling statements or not reconciling in a timely manner keeps possible mistakes on your account past a time when they can easily be resolved. Negative results of failing to reconcile statements could include paying more than you expect for goods or services, paying bank or finance fees you didn't agree to or bouncing checks due to mistakes in company checking accounts.” Needless to say, the effects of not regularly reconciling your statements can snowball into your tax filings by causing you to submit the wrong amounts or miss deadlines all together.

Spending your way to success

Jennifer Cue, CEO of Jones Soda : "The worst mistake you can make is trying to spend your way to success. "When I came to Jones as CEO, we were a $17 million company spending $11 million before manufacturing costs and losing $7 million annually. Cuts were necessary across the board.

"Of course, the only thing worse than overspending is cutting back and not leading by example. In addition to reducing our spend on things like marketing and advertising, coming back, I chose to take a very low salary, offset by equity. Shortly after that, the entire board aligned themselves and agreed to take a major pay cut, too.

"Overspending sneaks up on the best of us, both professionally and personally. And the more capital you have, the easier it is to fall prey. Facing dire situations demands making cuts, but to truly lead by example, those cuts have to extend across the board." Takeaway: Jones Soda's monumental turnaround was built on that principle, and if you're in a similar situation -- regardless of your overall size -- the same approach should be adopted.

Following revenue instead of profits

Syed Balkhi, CEO of OptinMonster WordPress Beginner : "During and after the fast-growth stage, it's easy to get distracted by top-line revenue and lose sight of bottom-line profits. It sounds obvious, but it happens all the time.

"Hockey-curve growth is exciting. But it also makes you lose perspective, and you start carelessly spending money on every new tool, database and service that will help you continue to grow revenue. You add new employee perks, hand out raises and pile on incentives that simply are not proportional to what you're actually bringing in after all those expenses." Takeaway: Revenue is a seductive metric. And yet, for all its allure, it's profoundly empty. Much heartache can be avoided by staying as focused on the bottom line when you hit enterprise status as you did in the early days when the stakes were high . . . because the truth is: They still are.

Living Paycheck to Paycheck

In March 2018, the U.S. household personal savings rate was just 3.1%, according to Federal Reserve data . Many households are living paycheck to paycheck , and an unforeseen problem can easily become a disaster if you are not prepared. The cumulative result of overspending puts people into a precarious position – one in which they need every dime they earn and one missed paycheck would be disastrous. This is not the position you want to find yourself in when an economic recession hits. If this happens, you'll have very few options.

Many financial planners will tell you to keep three months' worth of expenses in an account where you can access it quickly. Loss of employment or changes in the economy could drain your savings and place you in a cycle of debt paying for debt. A three-month buffer could be the difference between keeping or losing your house.

The Bottom Line

To steer yourself away from Financial Mistakes, start by monitoring the little expenses that add up quickly, then move on to monitoring the big expenses. Think carefully before adding new debts to your list of payments, and keep in mind that being able to make a payment isn't the same as being able to afford the purchase. Finally, make saving some of what you earn a monthly priority, along with spending time developing a sound financial plan.

Take the Next Step to Invest The offers that appear in this table are from partnerships from which Investopedia receives compensation.