Almost anyone who owns a business will tell you they are constantly worried of Financial Mistakes. It can be time-consuming to manage operations, employees, vendors, and financial issues, let alone other matters.
When it comes to financial health, there are so many things to consider – whether you’re just starting out or have been in business for years.
In this article, we’ll examine some of the most common financial mistakes that lead to economic hardship. Steering clear of these mistakes could help you stay afloat, even if your finances are already struggling.
1. The Paycheck to Paycheck lifestyle
U.S. households save 9.4% of their income in June 2021.2 Many people live from paycheck to paycheck, and if you are not prepared, an unforeseen problem can quickly become a disaster.
When people overspend, they put themselves in precarious positions where they need every dime they earn and missing a paycheck would have disastrous consequences. An economic recession is not the time to find yourself in this position. Otherwise, you won’t have many options.
Financial planners typically recommend keeping three months’ expenses in an account where you can access them easily. You may experience loss of employment or changes in the economy, which can drain your savings and place you in a debt cycle. A three-month buffer could mean the difference between keeping your house or losing it.
2. Not putting money aside for retirement
By doing so, you may never be able to stop working if your money doesn’t work for you in the market or in other income-producing investments. Having a comfortable retirement requires regular contributions to retirement accounts.
Invest in tax-deferred retirement accounts or employer-sponsored retirement plans. Consider how much risk you can tolerate and how long it may take for your investments to grow. Make sure this aligns with your goals by consulting a financial advisor.
3. Repaying debt with savings
If you have debt that costs 19% and a retirement account that makes 7%, you might reason you’ll be able to pocket the difference if you swap the debt for the retirement. Unfortunately, you can’t.
Additionally, compounding is lost, and you may be hit with hefty fees if you have to repay those retirement funds. It is possible to borrow from your retirement account with the right mindset, but even the most disciplined planners have difficulty setting aside money to rebuild such accounts.
The urge to pay back the debt usually goes away after the debt paid off. Continuing to spend at the same pace will be very tempting, and you may end up going back into debt. You need to live as if you still had a debt to pay—to your retirement fund—if you’re going to pay off your debt with savings.
4. Lack of succession planning
Many business owners are afraid of thinking about their retirement years, so they fail to prepare for them or rushed through the process.
An effective succession plan accounts for contingencies unique to the business owner, taking into consideration several scenarios, facilitating the transition at the appropriate time and considering tax implications. For instance, a business owner struck by falling rocks as he drove. The succession plan he had, a life insurance policy, didn’t work, but his wife had to sell the company for pennies on the dollar because he no longer could run it.
5. Having an incompetent bookkeeper
Up front, bookkeepers and accountants seem expensive and many business owners believe that they can do it themselves or find a low-budget solution. Making decisions based on accurate numbers is vital to making the right strategic decisions. Generally, paying a little extra, or verifying the bookkeeper’s skills, is well worth the effort.
6. Insufficient emergency fund
You can make one of the biggest mistakes as an entrepreneur if you don’t have an emergency fund to tap when times get tough – and they most likely will sooner or later. Make sure you have a business savings account if you do not yet have one.
7. Buying too much inventory
Purchasing more inventory than needed is a mistake many new entrepreneurs make. Additionally, if they have borrowed money to make or buy the overstocked items, this can leave them with debts that affect their cash flow. It might be tempting early on when you are preparing to launch your business for the world to load up on resources. Experienced entrepreneurs are usually very good at this. Be realistic and avoid temptation.
8. Not focusing on cash flow
You should pay special attention to your business’s cash flow. It’s easy to get caught up in profits, but without a consistent and healthy cash flow, you might find yourself in financial trouble, even if the profits are there. A constant analysis of sales, accounts receivable, and shortfalls is essential.
You shouldn’t allow your accounts receivable to drain all your cash.2 Sales are good, but timely payments are even better. Outstanding accounts cannot use to pay bills, and they cannot used as money in the bank.
It is possible to smooth out slow periods or while waiting for customers to pay your bills with a business line of credit.
9. Keeping business and personal finances separate
You must keep your personal and business finances separate. Financial turmoil will almost certainly result from failing to do that.
10. Having no tax plan
Entrepreneurs make the straightforward, but major error of not planning for taxes when they are starting up, especially if they are used to receiving a paycheck from an employer that includes withholding taxes. Don’t wait until the final tax deadline to pay your estimated taxes; pay them each quarter instead.
Begin monitoring your little expenses first, then proceed to monitoring your big expenses to avoid overspending. Be careful before adding new debts to your list of payments, and remember that being able to make a payment does not mean that you can afford the purchase. Spend time developing a sound financial plan, as well as committing to saving some of your income.