Fifty percent of small businesses fail within five years. Now, that’s a troubling statistic. What goes wrong? Are you making missteps that could lead to financial failure?
Find out the top financial mistakes that are all too common for small businesses — so you can ensure that you’re not caught in the same painful cycle.
Mistake #1: Not sticking to a budget. When you’re caught up in your business, it’s easy to overlook the importance of budgeting, which can lead to disastrous and costly consequences.
A budget provides a roadmap for your business’s financial journey, allowing you to set realistic goals, allocate resources effectively and make informed financial decisions. It also can help you identify potential financial pitfalls before they become major issues.
Mistake #2: Failing to differentiate personal and business expenses. By keeping personal and business finances separate, you not only maintain accurate records, but also protect your personal assets.
In the unfortunate event that your business faces legal issues or bankruptcy, having separate accounts can shield your personal savings, home and other assets from being seized to cover business liabilities. In addition, keeping separate accounts helps simplify your tax reporting, ensuring that you stay compliant and avoid unnecessary penalties.
Mistake #3: Using credit cards to cover business costs. While a credit card can increase your company’s purchasing power, business credit issuers can lower your credit limit and raise your interest rates at any time.
By putting major expenses on a card, you may pay significantly more in the long-run. Instead, business loans may be a smarter option due to lower rates.
Mistake #4: Expanding your headcount too quickly. During an upswing, it may be tempting to quickly to add to your team. But hiring, training and maintaining new staff is a hefty expense that might not be sustainable. And if you have to let them go, creating severance packages and extending insurance benefits also carry a price tag. Unless absolutely necessary, hold off on hiring to see if the growth persists.
Mistake #5: Neglecting to build an emergency fund. Failing to plan for unforeseen circumstances can leave your business vulnerable to financial shocks. Building an emergency fund is essential, providing a safety net to help you weather unexpected expenses, such as equipment breakdowns, legal disputes or economic downturns. Without an emergency fund, you may be forced to rely on credit cards, which can cripple your business’s financial health in the long-run.
Mistake #6: Doing your own taxes. Did you know that 77% of percent of small business owners feel the burden of business taxes? Unless you’re a tax professional, tackling your own business tax return can lead to trouble.
For example, if you claim too many deductions, you may find yourself getting audited. If you don’t claim enough, you could end up owing the government money that you haven’t budgeted for. There are many variables that can impact your company’s tax circumstances, so it’s your best bet to consult with a trusted business or tax advisor.
Take charge of your finances now — before it’s too late
The professionals at Magone & Company can help you navigate debt traps, business taxes and smarter financial management practices to help keep your business afloat. Call us today at (973) 301-2300 for a specific evaluation of your situation.