You started your business for a reason. Perhaps you’re seeking freedom, you want a better lifestyle, you’d like to earn more money or you want to run your own show and make a difference in the world. Although ambitious, small business owners sometimes don’t have the knowledge required to make informed decisions about their finances from the start.
I see so many business owners working long hours and relying on band-aid fixes all the time just to pay the bills. This is not sustainable. Do you know that even a million dollar business won’t bring you any closer to achieving your dreams unless you’re also managing your money well? In fact, even some of those who show up as financially successful are in a mess behind the scenes.
To ensure your business survives and thrives you should avoid these common but harmful financial mistakes.
Mixing personal and business finances
When you run a business, you have to develop the mindset that it is an entity that is separate from you personally.
Opening a dedicated business bank account is one of the easiest, yet most overlooked, tips for managing your business finances, especially when your income is irregular. I’m sure you’ve heard this advice many times but it’s so important. Apart from the obvious benefits in ease of accounting and doing your taxes, it will also save you time and your sanity.
If you don’t already keep your business and personal money separate, here are some tips for you to get started:
- Open a separate business bank account solely for business-related income and expenses.
- Calculate how much you need to make to meet your business and personal expenses? This will help you work out your revenue target.
- Regarding personal expenses, treat your business account as you’d treat a former employer’s — hands off. If you have to pay for a personal expense from your business, you’ll need to identify it as “owner drawings” (withdrawals).
- If you’re putting money into your business, set that up as either a loan from you to the business (to be repaid) or an owner investment in the business.
- You’re your own boss; make it official and pay yourself each month from your business account. (The amount doesn’t matter; you deserve a reward for your efforts.)
Failing to manage cash flow
In Australia many small businesses fail within the first 3 years and poor cash flow management causes 90% of these failures. This is why it’s so important to pay attention to your bottom line, especially if your income is inconsistent.
It’s a common misconception that your accountant will keep watch over the business. In reality, it’s your job to manage the money flowing into and out of your business day-to-day (cash flow).
Cash flow is not the same as profit:
Revenue – Expenses = Profit + Cash in the bank = Cash position
So, your business can be profitable according to your books but still not have enough cash on hand to pay the bills. In fact, many profitable businesses fail because they run out of money so it makes sense to track these numbers.
You can start with a simple cash flow management spreadsheet. Cash flow management will:
- allow you to see problems ahead and fix them before they occur
- help you decide when to invest in your business
- help you set your revenue goals and plan how to deal with low (or zero) income months.
It’s inevitable that you’ll make financial mistakes and learn some hard lessons as a small business owner, but if you can avoid these two pitfalls you’ll build a solid financial foundation for long term success.
Do you relate to these common money management mistakes?