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Financial Mistakes Small Business Owners Make

We all make mistakes and experience failures. Entrepreneurs are not new to this because it is in their nature to be risk takers. The vast majority of entrepreneurs made financial mistakes at some point in their entrepreneurial journey. Some of these financial mistakes are usually committed at the beginning of establishing their business.

These mistakes can cost you money and put your business at risk in the long run if you are not able to prevent these wrong financial decisions. Some of these are also financial practices that you are not aware of being a mistake and tend to become a larger problem down the line.

Now, let’s take a look at the common financial mistakes small business owners make.

1. Not separating business finances from personal finances.

Whether you are a freelancer or a new small business owner, you should always have a separate bank and credit account for your business. This is to protect your personal assets from your business assets, and vice-versa. With this, you are able to maintain accurate records of your income and expenditures.

Why is it important to separate you business and personal finances?

One benefit of this is that it can help you with the smooth filing of your taxes since you are able to provide an accurate record of your finances.

Another benefit of this is for your personal security. You need a legal protection to divide your personal finances against your business finances, in case your company has encountered legal problems, your personal assets would not be at risk.

2. Not preparing for tax obligations.

As a self-employed, you are responsible to pay your business tax through the year. Calculating your taxes accurately takes time and effort. So a helpful tip here is to make estimated quarterly payments to the IRS to avoid huge tax bills at the end of the fiscal year. For your business to stay and operate legally, you need to pay attention to how much you need to pay for your taxes.

3. Unnecessary expenses while starting up.

You need to know what the difference between necessary expenses and frivolous expenses. Lack of capital is usually the reason why small business startups fail. However, sometimes, the cause of their lack of capital is due to unnecessary or extravagant spending. Extravagant entrepreneurs tend to overspend believing that they will reap the reward of their business immediately. Some unnecessary expenses are:

  • Getting fancy and expensive office/commercial space.
  • Getting expensive and hi-tech office equipments.
  • Overstaffing or hiring someone before the business has the budget to support it.

We want the best for our business to help it grow. However, even if we feel that the big purchase we are planning to make is an investment, we need to think about these decisions carefully and ask ourselves if this purchase will help us generate revenue and the return on investment in the future.

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4. Failure to keep an emergency fund.

You need an emergency fund to protect yourself from unexpected expenses. Also, your business needs an emergency fund because this will stand as your financial safety net cover. This emergency fund can be used when your sales slumps or when your small business got caught up in unforeseen circumstances that your insurance package doesn’t cover such as earthquake and flood.

Just like your personal emergency fund, business emergency fund should have 3-6 months worth of your expenses, and this should be reserved. You will feel more secure and confident to operate your business when you know that you are able to handle unexpected financial emergencies by building your emergency fund.

5. Making big personal purchases when your business starts making cash.

When your business starts generating cash, you might get tempted to buy personal things, like purchasing a new car or home.

However, the reality is, during the first few years of your business, you will bump into some roadblocks and unexpected challenges. If you make large personal purchases and your business go through some unexpected challenges that involves cash; you might have problems funding your business or paying for these purchases over the next few months.

You should have enough cash to fund business emergencies and other needs of your business for its expansion. 

Most successful entrepreneurs use the “delay gratification” or the ability to resist an impulse and wait to get what you want, even bigger and better.

There are plenty of other mistakes small business owners make, and managing their finances is one of those. Being aware of the common financial mistakes will help you foresee your business funds and prevent yourself from making these financial mistakes.

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About The Author

Esther B.

Esther B.

Esther is a writer whose work focuses on career and personal development. She has also been YourTango’s Expert Partner where she wrote articles mostly for women to encourage them to have a meaningful life and healthier relationships. Her articles were constantly in YourTango’s weekly top ten for highest number of page views and her works have been featured in MSN and POPSUGAR. She also has almost 8 years of experience working for top publishing companies (Wiley and Cengage Learning) helping authors publish their books and research papers. When she is not on the computer, you’ll likely find her in the kitchen busy looking for snacks to eat.