STACE Business
April 25, 2022
Financial Management Mistakes to Avoid in Your Small Business

Financial Management Mistakes to Avoid in Your Small Business

Everyone makes money mistakes. Don’t beat yourself up if you have made such mistakes as well- you’re not alone. When it comes to small businesses, money mistakes are arguably subjective. Although you might regret taking a loan to start your business, the capital was necessary to launch your business. Regardless, you can take some mindful steps to avoid running into debt.

I can only hope that by outlining these possible pitfalls, you will be able to avoid some common financial management mistakes so that your business can flourish without financial drawbacks.

Not Separating Personal Money from Company Money

Sadly, this is one of the most common financial management mistakes many entrepreneurs make. This can run your business into a significant loss. The damage caused by this habit is worse in the retail and service-based business sectors, where the flow of sales and patronage can suddenly increase.

Don’t make the mistake of paying personal bills with your company’s money.

Ignoring Loan Interest Rates and Charges

It is not a crime to take loans for your business. However, paying high-interest rates for your loans is a trap you must avoid at all costs. You must always analyze the interest rates and charges tied to your loan. Take the pain to compare interest rates before you decide to take a loan.

Not Paying Attention to Cash Flow

The importance of cash flow in financial management cannot be overemphasized. This is how you can get an idea of the present state and the future of your business. It allows you to evaluate cash availability and your business’ liquidity.

You should always write down cash outflow and inflow. You should also project future receipts and payments. With this, you can easily anticipate important decisions like when to cut down on expenses without tampering with profit. It also helps you plan and avoid financial problems.

Failing to Plan for Rainy Days

We all hate being caught in the rain without shelter, not even an umbrella to shield us. As much as you don’t want to be drenched in the rain, you also don’t want your business caught in an unfavorable situation. This is why a rainy day plan is very important. If you fail to plan, the financial rainstorm can affect your business drastically.

The best way to save for rainy days is to open a savings account for your business. Build a reserve that will help you grow your business. Experience has taught me to have six months of operating expenses reserved for possible emergencies. While this might be difficult for a small business, it is achievable.

Running a Business without a Budget

One of the biggest mistakes small businesses make is unplanned spending. This is why budgeting is an essential aspect of financial management for every business. It simply pushes you to avoid reckless spending. Your budget allows you to channel resources appropriately and helps you keep your expenses in check. With a proper budget, you’ll be sure not to spend more than you earn.

When you stick to your budget, you can easily keep track of every financial detail. This is a sure way to sustain your business and achieve long-term goals. Don’t forget to also budget for future and unforeseen expenses.

Making Large Purchases Early in the Business

There’s a thrill and excitement that comes with starting a new business. You suddenly have the urge to buy everything you need for your business. The goal is to adhere to industry standards. You want to buy large cookers and dishwashers for your restaurant to stay ahead of your game. There’s nothing wrong with wanting to be the best, but it comes at a cost. Can you afford it? Especially as a small business that has just started.

What this means is that you have to be intentional about your purchases. Is the big purchase going to help you? Can you do without it? If it’s something you can do without, then you can hold for a while.

Only spend large sums on things that can help you grow your business strategically. The bare minimum is always enough for the early days of your small business. You can then afford to buy those beautiful, nice-to-have items when you have gathered enough disposable cash.