How well are you managing your small business finances? Many entrepreneurs fall into money traps early on. Read on to find out if you're making the same mistakes.
Although taking your first steps into small business ownership can come with a lot of excitement, it can also come with an equal amount of risk.
With every dollar truly counting for small business owners, it is important that you are aware of the various money traps that other small business owners have fallen into before you.
This way, you will be better prepared to avoid those same small business money traps yourself.
If a particular expense is not impacting your core business directly, then eliminating that expense may be worth thinking about.
If you do so, your small business will have more funds that can improve its ever-important bottom line and additional capital to apply to your overall business vision.
Steering clear of such money traps will allow a small business owner like yourself to invest further into powerful assets like marketing, inventory, or equipment.
# 1. Incorrect Financing
When the time comes for fresh small business owners to seek financing, they sometimes can become overwhelmed by the types of loans that can provide the necessary capital.
This often results in these individuals selecting a type of financing that is not appropriate for the small business’s needs.
It is vital that you look into the exact repayment terms you are being offered. Failure to do this could land both you and your small business in monetary trouble in the near future.
Be sure to match the kind of financing to the goal you have for these funds.
If your financing needs center around long-term small business investments, like equipment, then you should seek a long-term small business loan.
If, on the other hand, you are simply looking for some working capital, then it is typically a better decision for you to select a short-term loan.
Additionally, do not accept long-term financing for small business expenses that will likely need to be upgraded or replaced before that repayment term is over.
This mistake will have you continuing to pay off a business asset you no longer have.
#2. Excessive Hiring
For new small business owners, the task of managing payroll can be incredibly daunting. This is particularly true for staffing expenses that go beyond an employee’s actual paycheck.
Some small business owners fall into the unfortunate trap of not accounting for additional staffing expenses, such as taxes, training and managing.
For this reason, some people chose to use contractors for their small businesses during the early stages.
This allows their businesses to have essential tasks taken care of at a fraction of what an in-house employee would cost.
Another employee related money trap that plagues small business owners is the mistake of hiring employees who are not experienced enough.
In the short term, this will appear wise because a business owner can pay these inexperienced individuals lower wages.
Unfortunately, though, you may end up creating even higher staffing expenses for yourself in the long-term.
If these inexperienced employees are unable to effectively execute the tasks you assign to them, then it will be necessary for you to spend either your time or your business’s money to train them.
#3. Ineffective Marketing
Overspending is sadly quite common when it comes to the way that small business owners choose to approach marketing.
In particular, marketing campaigns that are not appropriately targeted can have a resoundingly negative return on investment.
For small business owners looking to avoid this mistake, the best thing to do is pay close attention to not only your small business’s operational model but also its target market.
You may find that another company’s marketing efforts do not perform very well when applied to your region, niche or customer base.
When coming up with an appropriate small business promotion strategy, it is best to get advice from a comprehensive marketing source.
Try to avoid social media firms, ad agencies and PR firms.
These companies will often try to sell you on the specific type of marketing that they specialize in, regardless of whether your business’s vision and target market is appropriate for that form of marketing.
The basics of efficient small business marketing include, but are not limited to, researching your customer base, writing up a unique selling proposition, or USP, and then tracking your marketing efforts and their ROI meticulously.
#4. Not Separating Business and Personal Funds
Although some small business owners will not need to be told this, it is never advisable to allow your personal finances and your business finances to mix.
Personal financial stresses are something that small business owners at every level have to deal with.
Whether these pressures come in the form of university tuition, mortgages, medical expenses or car payments, some people resort to taking funds out of their small businesses so that they can pay for these unrelated personal financial obligations.
Regardless of their intentions, this practice can have disastrous consequences for their businesses.
If you are a budding entrepreneur or small business owner, you should never allow yourself to participate in anything like this.
Your business could be on its way out if you do not find a way to quickly return its funds. This is a surprisingly common cause of small business failures.
Entrepreneurs who wish to protect their small businesses from this risk need to exercise a very high level of self-control.
Whatever money is currently in your business is not to be used for the purpose of personal monetary obligations.
#5. Ignoring Warning Signs
If you want to run your new small business as smoothly as possible, then it is crucial that you learn to spot early warning signals of a potential business crisis.
If you decide to ignore these, then do not be surprised if your beloved small business encounters a disaster too large to overcome.
An entrepreneur who dismisses these signs because they lack the time, money or energy to look into these genuine small business reg flags is quite vulnerable to financial ruin.
Sometimes, people are simply too excited and optimistic about running a new small business. They allow their entrepreneurial optimism to effectively blind them.
Pragmatism is an essential entrepreneurial trail that small business must learn to develop.
If you cannot look objectively at your small company’s operations, it will be difficult for you to identify what its issues are.
If something does not seem to be running the way you know it should, then figure out why and begin working on a solution immediately.
Do not make the mistake of not addressing one of your small business’s issues because you believe it to be too minor or trivial.
It can still create major negative effects for your company later on.
#6. Not Planning Thoroughly Enough
Setting your small business’s goals from the beginning is an important first step that you should not skip out on.
Without a clear plan, you could be inching toward the trap of running your company inefficiently because you do not know where you are trying to take it, let alone how to manage it in a way that will be conducive to that vision.
One thing that can help small business owners with this issue early on is properly defining their company’s overall vision as well as its customer base’s desires.
With this knowledge, you can then move forward and manage your small business in a far more effective way.
Using this information as your foundation, you can then begin crafting detailed business goals.
This will give an understanding of the skills your small business will require to reach those goals.
It will also help you when it comes to estimating how much small business capital you will need in order to hit these targets.
As long as these detailed business goals are actually obtainable, you will be doing yourself a favor by getting this out of the way.
Both short-term and long-term small business goals are important to consider. They will better inform you when the time comes to take on significant business decisions.
#7. Overspending on Office Space
If you plan to have a physical location, then do not overlook the importance of proper office space selection.
While you may believe that a more luxurious office space will improve your small business’s image, this is primarily an ego-based business decision, and it is likely to end poorly.
Small business owners would be wise, at least in the early phases, to be more conservative when it comes to office space expenses.
Overspending on a nicer and pricier business location is all too common among those who are new to the subject of growing a profit-generating small business.
Analyze what your small company actually needs in terms of a physical space.
Once you thoroughly understand these office space requirements, you can begin seeking out viable and affordable locations.
It is typically best to not allocate more than 20 percent of your small business’s monthly budget toward an office space.
In the long run, outgrowing your business’s current physical location is a much better problem to have than fighting to justify the expenses of an oversized office space that you do not currently require.
#8. Failing to Keep Detailed Records
Can you account for every last dollar that has flowed either into your small business or out of it? If you cannot, then this is a major issue.
It is quite irresponsible, and small business owners who are not monitoring their companies’ cash flow are managing these businesses in a financially dangerous manner.
Do not let your business fall into the monetarily devastating trap of improper record keeping.
If you struggle to do this, then bring on a new staff member to relieve you of your financial record keeping duties.
Regarding financial records, yours should be not only impeccable but also simple to search up. You can capitalize on these thorough small business financial records to develop different plans.
If, for example, your small business’s financial records reveal that online sales are contributing to a greater portion of your revenue than you predicted, then it might be time to begin scaling your online advertising and investing in a more efficient website.
Record keeping, therefore, is not only for tracking your small business expenses. It is also essential information that can help you acquire a lot of new customers.
So What’s Next?
Managing your finances as a business owner is not the only skill you need to master when running your small business. Check out our list of other important skills you’ll need if you want to give yourself the best chance for success.