Congratulations on the successful business that you have been running. It is genuinely one of the most satisfying feelings to make yourself stable as an entrepreneur and turn into a businessperson.
You must have learned a lot along the way, managing clients, generating leads and escalating revenues. But it is possible that you are not prepared to manage your finances yourself.
It is quite important to keep your business financially compliant and stay on top of financial management. This way you will not get into any legal trouble and know the financial status of your business at any moment. It helps take key strategic decisions and gives you an idea of where your business is headed.
Financial Mistakes are one of the primary causes of company closures
Some errors can happen genuinely like not recording a minor expense, and some are major ones that can land you in a mess.
Here are 11 Financial Mistakes your business might be making without realization
Hiring the wrong finance guys
This is one the most genuine mistakes any business owner can make. The right kind of accountant can manage your finances in such a way that he will work with you together towards healthy growth.
On the other hand, incompetent accountants or people with hidden agendas of money laundering and fraud often take well-established companies along a downward spiral.
A professional accountant will possess the required skills and knowledge to handle your business with expert precision. He will take care of classifying expenses, tax updates and filing and correct analysis and interpretation of financial statements.
Someone without this knowledge can make errors that result in everything from penalties, misinterpreting facts about assets, making bad-faith estimates and using the wrong type of accounting methods, bad-faith estimates.
Increasing Fixed Costs
Fixed costs like property investments, new equipment or hiring a wave of new employees to pose problems when mistakenly added to accounting numbers. Increasing useless overheads put a strain on your business cash flow.
The better way to go about this is renting stuff.
Improper bookkeeping and accounting
I get it. Accounting can be like one of the most tedious tasks in the world if you are not into finance. Moreover, you have to focus on more core functions like marketing and product development.
However, inconsistent accounting and bookkeeping may lead to severe issues. Processes like checking business statements, credit card statements, sales tax accounts, and following up on unpaid invoices should be overseen.
Messy accounting can lead to irregular cash flow and bad credit ratings, which then disrupts smooth business operations. You lose your capacity of making sound business decisions.
Make sure that make this a priority by setting aside at least one day per week to complete financial statements.
Overlooking hidden expenses
Accounting mistakes are bound to happen if you don’t undertake proper financial supervision. Sometimes, businesses fail to record hidden expenses.
You have to realize that standard accounting procedures (that you may have no idea about) mention costs and expenditures that are very indirect in nature and can go overlooked. Some of them include:
- Employee turnover
- Payroll Taxes and Benefits
- Licenses, Permits and insurance plans
- Inventory reduction in case of damage/theft/manual error
- Bank or Credit Fees
- Payment Delays
- Professional services: Legal, Financial, etc.
- Repairs and Servicing
Make sure that such costs are always included as they are incurred!
Mismanagement of Sales
Smooth business growth calls for proper management of the company’s margins. Mismanagement of sales leads to serious business consequences and have been the reason for failure for many companies.
Here are some things to keep in mind:
- Don’t keep your pricing too low with the goal of breaking the market. While staying competitive is good, keeping your margins substantial so that you generate revenues for the business is also important
- Don’t depend on only one revenue stream. Keep your sources diversified. This helps in keeping your cash flow healthy, attracts new potential leads and spreads all associated risks with your business.
- Have standard procedures and Supply Chain Software to keep track of sales.
Insufficient knowledge of accounting software
Accounting software like QuickBooks is a real boon for business owners. They allow you to create simple financial frameworks connect with your accountants and manage all sorts of transactions smoothly.
For instance, with QuickBooks, you can send personalized invoices, set up recurring invoices, link your bank and PayPal accounts, handle payroll, taxes and even monitor your budget.
However, there is a learning curve associated with such software and if you are not willing to devote time to learning them you are bound to commit mistakes. Get some experience with the software. Read the tutorials and start taking an interest in your finances.
How would you feel if someone else mishandled your hard earned money?
Incorrect classification of employees
Understand the difference between people who permanently work for your company and people who work under independent temporary contracts.
If you mistakenly add a freelancer on employee payroll, then you will have to cover salaries and benefits, which would not have been the case otherwise. With employees, you are responsible for withholding taxes and providing them benefits since they work directly for you.
Understand the pros and cons of working with both kinds and correlate them with the demands of your business to find actionable and cost-effective solutions.
Not creating separate liabilities for taxes
When it comes to Taxation, nobody is safe from the government. You may ignore taxes and not create sufficient funds for them. You may then completely forget about it. It’s an honest mistake, isn’t it?
Well, you will be imprisoned for the same by the tax authorities. Therefore, proper tax provisions must always be available for your business to run smoothly.
Intermixing personal assets and company assets
As soon as you registered your company, it became a unique entity that can enter into agreements and make deals on its own. It can buy its property and equipment.
You need to understand the difference. Your personal assets should be different from that of the company. For instance, if you use your credit card to pay your corporate telephone and Internet bills, it’s okay. These can be recorded quickly as business expenses.
However, suppose you buy a plush vacation with your company card. You will have to record it as a business expense, and that can land you in trouble when tax season comes!
Furthermore, it makes bookkeeping less complicated since you don’t have to be worried about mixing up those personal and company expenses. The easiest way to achieve this is by maintaining separate accounts for your personal and corporate transactions.
Receipts allow a company to track its spending, keep tabs on tax deductions and be useful at the time of company audits. Therefore, it is important to keep them stacked.
Back in the day, businesses would use to paper receipts all the way and stack them into ledgers. Today, we can digitize them and store them easily to be printed at a later time.
While creating a business/startup, entrepreneurs lay their entire focus on product development and marketing and most often financial frameworks are neglected.
This is a planning flaw that needs immediate redressal. Such lack of planning can lead to catastrophic scenarios like:
- Accumulation of high debt
- Insufficient funds and lack of capacity to raise them
- No preparation for cash-flow fluctuations
- Miscalculations in prolonged budgets
- Not creating short term or quarterly budgets
- Raising needless amounts of money before generating bankable traction
- Cash burning activities like incessant advertising
This practice needs to stop. If your financial planning is weak then sit down, take a deep breath and do not move further unless you have your financial framework sorted out!