Running a business isn’t always easy, and there are various challenges that can halt or reverse growth however, few are as dangerous as those that directly impact your finances. Fortunately, you can mitigate financial risk by taking control of your spending and monitoring cash flow.
Here are four common small business spending mistakes as well as a few suggests to help you avoid them.
4 Common Small Business Spending Mistakes
1. Failure to separate business from personal expenses
In the early stages of business, it’s easy, sometimes even essential, to rely on your personal finances to fund your business expenditures. However, doing so can cause long term problems for both your business and your personal finances.
Once you open your business, you should make every effort to separate your finances, and that means opening a separate bank account and potentially a business credit card. Doing so can help you avoid bookkeeping confusion or tax problems down the road. It can also empower to better evaluate your businesses finances and spot existing or potential cash flow issues before they become a problem.
2. Not creating and using a budget
For many people, budgeting is a hassle, but when it comes to your business, the long-term value far outweighs the initial effort.
A budget will help you make educated decisions about everything from inventory and supplies purchases to staffing and development decisions. Conversely, when you don’t have a budget, those tasks become more challenging and you can run into significant cash flow issues. This is particularly true if you operate a business with seasonal shifts, and you’ll need to be able to use cash flow from the busy season maintain operations during the slower months.
The good news is that there are plenty of apps, like Adaptive Insights, Scoro, and Centage, that can help you create and maintain your budget. Plus, budgeting and keeping track of your expenses now will come in handy at the end of the year when it’s time to review performance and prepare for tax season.
3. Failure to seek financing when you need it
Working capital is essential to business operations and growth, and when it starts to run low, you can face a world of issues. Bills can go unpaid, leaving you with mounting fees and a potentially lower credit score. Making payroll can become challenging, which may lead to the departure of your top staff members. And, in some cases, inventory, supply, and staffing shortages can lead to poor customer service and ultimately a decrease in traffic and revenue.
Ultimately, the inability to meet one financial obligation can quickly impact various areas of your business.
For that reason, it’s important to recognize when cash flow or limited working capital may become an issue and to be ready to seek assistance before things get out of control.
4. Ignoring your credit scores
Recognizing when it’s time to consider a loan, a line of credit or other financing option is important, but your due diligence may be in vain if your not a qualified borrower. As such, it’s important to keep your eye on both your business and personal credit scores.
Your business credit often impacts your ability to enter into financing options with your vendor or supplier, an arrangement that can help you through gaps in cash flow. In addition, a healthy business score can lead to lower loan interest rates and insurance premiums.
That said, in many cases, it’s your personal credit score that will help you secure more affordable financing terms, particularly when it comes to credit cards, loans, and lines of credit.
That may be confusing, especially since the act of separating business and personal finances is traditionally considered a best practice, and it is. However, as the primary applicant on a lending agreement, your personal credit is frequently used to determine eligibility, interest rates, and repayment terms.
Consumers are entitled to a free, annual credit report, and you should definitely take advantage of that. Business credit reports aren’t always as easy to obtain, but you can get your business credit report through Nav.
There are many reasons why you may experience financial issues, and while you won’t be able to plan for every potential scenario, there are many things you can do to avoid unnecessary cash flow issue. Take the time to be proactive in your approach to finances and you’ll likely experience the benefits of a healthier bottom line.
Ready to see your credit data and start building better business credit? Check Your Personal and Business Credit For Free (No Credit Card Required).