The Most Common Financial Mistakes Small Business Owners Make

increase profits - The Most Common Financial Mistakes Small Business Owners Make

Many individuals choose to form a limited liability company (LLC) because they are tired of working for someone else or want to have a better lifestyle. Some take a long time to plan before finally pursuing the dream of being their own boss. Meanwhile, there are those who decide to take risks without proper preparation. Being an entrepreneur requires courage. However, it is more than that. You need to consider various factors and have certain skills in order to help increase profits.

Managing the Company’s Finances

Business owners, especially those who are just starting, take on many roles. One of the most challenging is managing the finances of the business.

There are many reasons why emerging entrepreneurs find this aspect hard to handle. It may be due to a lack of background in finance. It may also be because a lot of small business owners tend to focus more on gaining customers to increase profits. As a result, many end up achieving mediocre results. Others are more unfortunate and fail.

Common Financial Mistakes That Won’t Help Increase Profits

Financial expertise is not necessarily a skill that most small business owners possess. However, improving the chances of your LLC to achieve success and increase profits is not impossible. You can start by understanding and steering clear of common financial mistakes that many small business owners make.

•   Not Having a Budget Plan – Having a budget allows your company to look at its income and monitor its expenses. It will help you manage your company’s finances and spending. Failure to create a budget or not paying attention to the plan you have created may lead to inappropriate spending, costly expenses, or forgetting about tax obligations.

What you can do is come up with a working budget and create a cash flow forecast rolled over on a set period of time. It can be at least on a quarterly basis. Doing this will help you know if the actual performance of your company is better or worse than what you expected. 

•   Cutting Costs Instead of Driving Revenue – One mistake that many small business owners make when thinking of ways to increase profits is by cutting costs. While that may help in some ways, you cannot keep on cutting on expenses as it may affect the operations of your business. Try to focus on finding opportunities to drive revenue.

•   Wrong Allocation of Resources – You have to analyze the cost-benefit of each option when thinking of how to spend capital. Weigh the pros and cons of expenditures. This way, you can properly allocate your resources and prevent overspending. Always ask yourself if what you are choosing is a good investment.

•   Entering Long-term Commitments Early – Having a large amount of money can give you a false sense of security. That is why many new entrepreneurs make the mistake of charging ahead as soon as they have funding for their business ventures. Among the first things that small business owners spend on are hiring many employees, renting a big office space, getting insurance policies, and leasing expensive equipment.

The problem is that you cannot tell how long it will take for a business to grow. So, making these huge long-term financial commitments early on creates a big problem. It will be difficult for you to get out of these commitments.

It is important for you to control your spending. Focus on growing your business first before considering spending money on additional employees or a bigger space.

•   Mixing Personal and Business Funds – No matter how big your company is or how long you have been in business, mixing your personal and business funds is disastrous. It will make it difficult to keep track of the flow of money. You will not know if your company is making money or losing it.

Making this mistake will also give you problems when tax season comes. It will be hard to determine what can be considered as deductibles on your company’s tax form or what your profits and losses are for the year.

If you are running an LLC, this practice will also result in piercing the corporate veil that comes with the business entity structure. When that happens, courts may hold you personally liable for the debts of your business.

As an entrepreneur, it is important for you to understand various aspects of managing a business. You should develop the right skills to address challenges. One way of minimizing risks is by preventing your company from committing financial mistakes.