Not Keeping Good Records
It is surprising that one of the most common financial mistakes small businesses make is the lack of proper records. The accounts of income, expenses, assets, liabilities, etc. cannot be maintained in detail without which it becomes difficult to get a clear picture of the financial position and operations of the business. Business records are crucial in decision making, securing finances, cash flow management, tax issues and many others.Lack of an Accountancy System
Besides record keeping, accounting is an essential aspect that small businesses cannot afford to ignore. An accounting system refers to techniques and procedures for recording transactions, preparing financial statements, processing payroll and tax, handling invoices and accounts receivable/payable, controlling stocks, planning and forecasting, cost and profit analysis among others. When accounting is not well done, there are always financial problems of one sort or another.
Poor Cash Flow Management
It is one of the most significant issues that affect most small business and especially the management of cash flows. Some of the cash flow errors include; failure to send invoices to the clients on time, offering long credit terms to the customers, having large inventories, failure to set aside money to cater for taxes and other forms of payments, inaccurate estimation of sales, incurring too many expenses than the income can support, and lack of cash reserve for emergencies. Cash management is an important factor that needs to be controlled by small businesses with a view of ensuring that adequate amounts of cash are available in the business to cater for various financial obligations.
Not Budgeting Properly
Creating precise budgets and budget forecasts is challenging, but it is critical for small business financial planning. While some organizations never prepare budgets, others prepare impractical budgets that do not resemble actual business costs and revenues. Thus, budgets should be made very meticulously, updated frequently and checked continually. This is where small business can go wrong especially where there is no budgeting or poor budgeting.
Not Using Accounting/Finance Software
Although, small businesses can only get a long way using Excel spreadsheets, they reach a time when they need to use better accounting/finance software to handle their finances. The right software helps small businesses work more efficiently, keep and store records, process financial and other data, analyze metrics, budget better, monitor spending, process payroll correctly, manage taxes, track inventory, monitor sales, and so much more. Failure to embrace technology hinders efficiency in managing expenditure and planning for the future.
Failure to seek advice of a qualified accountant
A large number of small business owners attempt to manage their taxes and accounting processes on their own to minimize expenses, especially at the beginning of company’s development. However, the failure to consult a qualified accountant often proves to be a regrettable decision that costs little but achieves less. An experienced accountant or CPA can help in matters concerning taxes, accounting laws, finance management for future expansion, establishment of business credit, finding out various opportunities for cost cutting and avoiding key financial mistakes. This is more than compensated for by their expertise.
Not Planning for Taxes
Most small businesspeople are often surprised by their tax liabilities because they never set aside enough working capital to meet the tax bill or maintain an adequate profit margin. Estimated income tax, payroll taxes, sales taxes, 1099 independent contractor taxes – it all goes quickly. Small business owners should budget and save enough cash to cater for the taxes so that they are paid on time or else they will be penalized for delay or under payment of taxes. In dealing with taxes it requires both discipline and pre planning to avoid being caught off guard.
Leveraging or, in other words, taking too much credit and risk
Greenhorn startup founders make some key mistakes, including securing large business loans, credit lines and other forms of liabilities too early or allowing costs and overheads to grow faster than revenues. Being over leveraged with too much debt as compared to equity and income is one of the most dangerous positions any small business can take since it exposes it to many shocks in the economy as well as other eventualities. Commercial loans and other obligations should only be incurred at reasonable levels that are in line with the responsible growth strategies.
Not Having Sufficient Insurance
Most small business people neglect standards of efficiency and economy by failing to install sufficient business insurance policies. Not having general liability insurance, errors & omissions/professional liability insurance, commercial property insurance, workers compensation insurance, cyber insurance, etc. means that small businesses are at risk of facing large scale financial losses from accidents, natural disasters, litigation, theft and other mishaps they cannot absorb. Having to pay for the right insurance also offers a great financial security blanket.
Failure to Undertake an Exit Strategy
Establishing and managing a small business enterprise is not easy, let alone putting measures to its future exits such as succession, selling, or shut down. An exit strategy defines how a founder can exit the business through different situations and at the highest possible value and also the least amount of taxes payable. Lack of an exit strategy hinders the process of developing business value, searching for buyers/successors, or selling assets at a later time. Small business owners need to begin planning for their exit strategies long before they actually plan on leaving.
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