Entrepreneurs should stay on top of their business’ finances; however, managing money while growing the business can be a tough job. Mismanaging your finances can cost your business big time. To keep your business financially healthy, you should avoid these money mistakes professionals think many business owners make.
According to the experts, 25 of the biggest money mistakes small businesses make are:
1. Failure to Identify Your Target Market
Ross Cohen, Co-Founder & COO, BeenVerified
One of the biggest business money mistakes is not spending time identifying your target market before getting your business up and running. You don’t want to spend years developing a product that doesn’t have a distinct customer base. Being able to pinpoint your target market will give you a clearer overview as to what products you should develop based on what your target customers need.
2. Failing to Establish Your Legal Business Structure
Wade Rasmussen, President, Amerifund Inc.
Many times, in the excitement of starting a new business, entrepreneurs skip the steps of establishing their business legally. This can cost them big time once they need to hire employees, purchase equipment, take a loan, and pay taxes. Following the proper steps of establishing one’s business in the beginning can save valuable time, money and stress on each of these fronts. The sooner a business is official on paper, the longer time in business they’ll have.
Read our article about the best business structures to learn more.
3. Not Preparing & Monitoring a Solid Budget
Octavia Conner, CEO, Say Yes To Profits
Business owners who don’t prepare and monitor a solid budget are committing a costly mistake that can eventually lead to their business’ failure. A budget is an asset to the business, but some business owners see it as a limitation. Without a proper budget, business owners will not gain control of their cash flow, and this may cause overspending.
4. Failure to Pay Your Bills on Time
John Story, Founder, Storyed
Whether it’s your rent, loan, or utilities, failure to pay your bills on time can cost your business a lot of money through incurring late payment charges and penalties. Late payment is a result of poor time and cash flow management. A simple mistake like forgetting your due date can be very expensive, especially if this happens several times in a year.
5. Hiring Too Many Employees
Tom Goodmanson, President & CEO, Calabrio
Hiring too many employees is one of the most common mistakes most businesses make. Staffing costs typically account for 70 to 80 percent of a contact center’s budget. Most of the time, the cost of employing more people does not equally offset the business’ income. Make sure to do a more comprehensive business analysis before you decide to hire more people.
6. Failure to Diversify Your Funds
Loreen Gilbert, Founder & President, WealthWise Financial Services
A common mistake that most business owners commit is putting the majority of their resources into their business. They do this in their best interest without thinking about the possible, undesirable things that can happen, such as the failure of the business. A wise financial move is to diversify your wealth apart from your business. This allows you to be prepared in case the unexpected happens.
7. Not Monitoring Employee-Initiated Business Spending
Lisa Henken, Chief Customer Officer, Netspend
Some business owners allow employees to make purchases for the business, and sometimes they don’t follow the budget set for such business expenses. As a business owner, you should have control over business expenses initiated by your employees. You can get a business prepaid or credit card for your employees to monitor their purchases and limit their spending.
Find a business credit card with great rewards and simple employee spending controls.
8. Overlooking Hidden Costs
Lourdes Martin-Rosa, American Express Advisor, Government Contracting
Hidden costs are those that you don’t usually account for, such as late payment charges, credit card interests, payroll taxes, and other operational costs like travel expenses. Ensure that you know these potential hidden costs, account for them, and prevent your business from having to pay them. You should calculate all costs within billable hourly rates, and these hidden costs should be taken into consideration when establishing billable rates for your clients.
9. Hiring the Wrong Person for the Job
Jan Bednar, CEO, ShipMonk
Another big and costly mistake some business owners make is hiring the wrong person for a job. Don’t get wooed by a candidate’s work experience and educational background. There are people who have great background but lack work ethics, good attitude, accountability, and leadership. As a result, the company will lose money paying an incompetent employee, and will have to cover the cost of having to go through the hiring and training process again.
10. Starting an Undercapitalized Business
Paola Garcia, Small Business Advisor, Excelsior Growth Fund
A common mistake is not having the right equity, financing, and/or investors to start the business. If a business is undercapitalized, it will have a very hard time to survive a competitive environment, setbacks, and slow seasons. Make sure to thoroughly analyze how much capital you need before starting a business, and find the right financing for your funding needs.
11. Failing to Automate Invoicing & Payroll Processes
John Baker, Business Development Manager, DeployBot
Invoicing and payroll are both critical financial processes that should be done clearly and accurately. Businesses that fail to automate these processes put their companies at a higher risk by exposing the invoicing and payroll transactions to possible errors that may cost them more money. It’s best to invest in the automation of your company’s financial transactions to prevent errors and unscrupulous transactions.
Read our article on the best payroll provider for 2018.
12. Holding Too Much Inventory
Anand Srinivasan, Founder, Hubbion.com
Inventory is classified as a “current asset,” which means that its value tends to change with time. Inventory tends to depreciate (for example, the value of a gadget goes down each time a new model is launched). Holding too much inventory is trading liquid cash for an asset that depreciates. If you fail to clear your inventory promptly, you end up with depreciating assets that only get more difficult to liquidate with each day.
13. Not Making Sure Your Technology Is Fail-Proof
Lori Cheek, Founder & CEO, Cheekd
If your business relies too much on technology and your online system, then you have to make sure that your technology is fail-proof. Some business owners commit a costly mistake of not testing their technology properly until it either crashed or was hacked. When this happens, your business could lose a lot of money rebuilding your system, and there will be a lot of opportunity loss on sales too.
14. Failing to Understand the Cost of Occupying a Property
Leslie Zeanah, Commercial Real Estate Agent, H&H Commercial Real Estate
Small business owners tend to purchase or lease real estate without understanding the occupancy cost and its effect on the business’ bottom line. Occupancy costs are costs related to occupying a space, like rent or monthly amortization, interest expenses, real estate taxes, personal property taxes, depreciation, and insurance on building and contents.
Find out more by reading our article on buying vs. renting commercial real estate.
15. Spending Your Budget on Non-Directed Advertising
Brandon Gotlieb, Founder, NXTSTOR
One common money mistake that most business owners make is spending a huge chunk of the business’ budget on non-directed advertising. Advertising or marketing in the wrong places or to the wrong people can be costly. Also, it will not help achieve your intended sales goals. Make sure to hire experienced marketing professionals who can effectively brainstorm the right marketing and advertising activities for your business.
16. Not Having a Realistic Revenue Forecast When Planning for the Future
Craig Bolanos, Founder & CEO, Wealth Management Group
A revenue forecast is an educated prediction about how much money your company will likely bring in. This helps you estimate what you can afford to spend and what your profit margin will be. This is needed for business planning, such as hiring new employees or launching a new marketing campaign. Without a thoroughly researched and realistic forecasting, it will be easier for your business plans to fail.
17. Not Understanding the Basics of Bookkeeping
Denise Beeson, Owner & Operator, DeniseBeeson.com
Failure to understand the basics of bookkeeping is a mistake that can cost your business big time. Small business owners don’t need to know the smallest details of bookkeeping, but they should have a good working knowledge of their cash flow, invoicing, payroll, and budgeting. They should know and understand the cost to run their business each month to be able to manage their finances carefully and efficiently.
For more information, read our bookkeeping guide.
18. Not Investing in Professional Services
Pat Obuchowski, Founder & CEO, inVisionaria
New small business owners think hiring professional services is expensive, so they try to do certain tasks themselves. However, they don’t realize that failure to invest in professional services, such as bookkeeping and web development, is a mistake that will cost them money in the long run. Also, business owners should be spending their time growing the business instead of managing their books and/or website.
19. Allowing the Wrong Clients to Pay on Net Terms
Robert Barrows, President, R.M. Barrows, Inc.
It’s normal for a company to allow some of their clients to pay on terms. However, letting the wrong clients pay on terms may result in your business losing money. The moment you notice your clients are having difficulty paying what they owe, make sure to stop completing work with them until they pay you to prevent further losses.
20. Relying on One Large Customer
John Ruane, Proprietor, Achieve Your Dreams
Relying on one large customer can be very risky for your business. While it’s true that customers are the lifeblood of the business, you should not make one customer your only lifeblood. Big customers can have cash flow problems too, and often, they can exert a great deal of pressure on smaller businesses for extended terms and discounts. Be sure to mitigate the risk by acquiring more clients.
21. Not Knowing Your Small Business Financing Options
Mary Goodwill, Owner, Mary’s Little Lambs
Starting and/or growing a business will require funding. Some business owners commit the mistake of getting the first financing option made available to them without shopping for more. There are different types of small business loans and it’s best to be familiar with your financing options to know which one best suits your business’ needs. This will help prevent paying higher interest rates than you should.
Read all our articles about small business financing.
22. Buying or Renting Expensive Office Space
Maynard Webb, Founder, Webb Investment Network
Some new business owners spend too much money for beautiful office spaces and nice facilities. Although wonderful and well-located office spaces and facilities will attract customers, the cost simply isn’t practical, especially when you’re just starting out. Be prudent in making decisions as to where your money should be invested, and expensive office spaces may just not be worth it.
23. Not Getting Sufficient Insurance Coverage
Michael Raines, Insurance Agency Owner, Raines Insurance Group
There are different types of insurance for your business. Make sure to get sufficient insurance coverage to protect your business from possible losses in case something undesirable happens. Failure to protect your business with insurance can cost you big time, especially when you’re faced with business- or employee-related litigations, accidents, and other business interruptions.
For more information, read our guide to small business insurance.
24. Failure to Save for Retirement
Hannah Xu, Founder, WealthAbility Forum for Medics
Failing to save for retirement is a common mistake both new and seasoned business owners make. Perhaps some people think their business will be there forever to sustain their lifestyles. However, time will come when you need to retire and let go of your business. It’s important to ensure that your future is secured. Making this mistake will cost you a comfortable future during retirement years.
See the six most common small business retirement plan options.
25. Not Doing Due Diligence When Working with Suppliers & Clients
Sandeep Todi, Co-Founder, Remitr
It is possible for businesses to end up working with suppliers and/or clients of dubious background. If you fail to do due diligence and background checking on those you’ll be dealing with, you could lose money if you end up dealing with the wrong people. Do not skip due diligence and background checks, even if these clients or suppliers are referred to you by someone you know.
Bottom Line: Money Mistakes to Avoid
Whether you’re just starting a new business or trying to grow an existing one, managing your business’ finances properly is important to your success. One wrong financial decision may cause your business to fail. Make sure to avoid the above money mistakes most business owners make to keep your business away from any major financial trouble.