Did you know that around 20 percent of small businesses fail within the first year? And, that about 50 percent of small businesses fail within five years?
While there are a variety of reasons that small businesses fail, a lot of times, it comes down to finances.
To keep your small business afloat, you need to make sure you aren’t making any major financial mistakes.
Which financial mistakes do you need to avoid?
Check out this guide to discover the most common finance mistakes small businesses need to avoid.
1. Not Separating Business Accounts and Personal Accounts
One of the biggest mistakes you can make as a small business owner is not separating your business banking accounts from your personal banking accounts.
Even if you’re just a freelancer or you’re not making a profit yet, you still need a separate account for your business. From the moment you start earning money for your services, you’re a business owner.
Whether you call yourself a consultant, freelancer, entrepreneur, or solopreneur, at the end of the day, if you’re declaring income on your 1099, then you own a business and therefore you need a separate bank account.
Creating a separate business account will make it easier to plan your quarterly tax estimates, do accounting for your business, and budget for unpredictable times. Additionally, setting up your own business account makes it a lot easier to keep track of every penny that’s going in and out.
Most importantly, setting up a separate account for your business can have a major psychological effect on you. Once you set up that business account, it’ll be much easier to start viewing yourself as a legitimate business owner rather than someone who just freelances on the side.
2. Launching Your Business Without a Business Plan
Another major financial mistake you can make is launching your business without a clear business plan in place.
A business plan is the foundation and blueprint of your small business. It helps you structure your operations as well as measure your progress. And, when the time comes for it, your business plan will help you convince others to invest in your business.
Even if you don’t need to do any fundraising to launch your small business, creating a detailed business plan is still important. This is because a business plan also serves as a roadmap for laying out your operational and marketing milestones.
When creating a business plan, you want to make sure you tell the financial story of your business’ past, present, and future. Your business plan should include monthly, quarterly, and annual goals.
Even if you’re not looking at investors right now, having this plan in place will prevent you from having to scramble something together if that time ever comes.
3. Not Planning for Tax Liability
Not planning for tax liability is another common financial mistake many small business owners make.
We all know how jolting it can be to see the amount that’s taken out from taxes when we work full-time jobs. Once you become a small business owner, it’s important to remember that you’ll be receiving payments for your products and services in full. Therefore, you’re now solely responsible for taking care of your taxes.
While staying on top of your taxes may feel simple from the beginning, especially if you’re starting a web-based business, things can quickly get complicated as your business grows.
To make sure you’re not shocked by how much you owe when April rolls around, we suggest paying your taxes on a quarterly basis.
4. Immediately Making Big Purchases
There’s no doubt that starting a small business can be exciting. In the excitement of starting a small business, it can be tempting to go out and by all the flashiest laptops, software programs, packaging materials, and more.
If you’re tempted to make big purchases in the early stages of starting your small business, think carefully before you buy. Before making a purchase, the main thing you should ask yourself is, “Is this purchase going to help me generate more revenue in the long-term?”
If the answer is no, then you should probably hold off on that purchase until your business has more funding.
5. Not Being Prepared for Slow Days
Every successful business has had times when business was booming and times when they were only hearing crickets.
The last thing you want as a small business owner is to get caught in a rainstorm without an umbrella. In other words, you don’t want to get caught in a situation where a slow down in profit causes your business to go under.
This is why it’s important to set up a rainy day fund for your business. A rainy day fund is similar to an emergency fund that you set up for your personal life. In other words, this is money that you set aside and only use it as a last resort.
When you’re just starting your business and every dollar counts, it can feel overwhelming to set up this sort of account. But, don’t feel like you need to flood thousands and thousands of dollars into this account right away.
Instead, keep things simple and treat this account as a regular monthly business expense. This way, you can slowly build up your reserve over time.
6. Not Buying Insurance
Another common financial mistake small businesses make is not buying the right insurance.
The two most important types of insurance you want to purchase for your business are general liability insurance and professional liability insurance.
General liability insurance will cover you in the event that someone sues your business because of bodily injury or property damage. Professional liability insurance will cover you in the event that someone claims you made an omission or error in the services your business provides.
If you have family members depending on your income, you may also want to purchase life insurance. You can view here to learn more about this type of insurance.
Common Finance Mistakes: Time to Act
Now that you know about the most common finance mistakes, it’s time to do what you can to avoid making them. By avoiding these mistakes, you increase the chances of your small business succeeding.
Be sure to check back in with our blog for more small business-related news and tips.