Like in life, when it comes to running a business, you’re probably going to make mistakes. Knowing what to expect can help you avoid serious and costly setbacks. 

Here are 13 common financial mistakes small business owners make, and how to avoid (or at least minimize) them. 

1. Mixing Personal and Business Finances

Mixing business and personal expenses is a very common mistake many small businesses make. 

Sam Morgan, MBA, is a Senior Certified Business Advisor with the University of Texas San Antonio Small Business Development Center. He recalls a time when one of his long-standing clients asked for help getting a working capital loan. Morgan reviewed the client’s financial records, and although the business had been formed as an LLC years before, it had only filed one federal tax record. When Morgan questioned the client, they said they always filed like that. In other words, despite having formed an LLC, “they continued operating as sole proprietors,” he notes.

“They were not able to get financing,” he points out, “and we worked for about a year to untangle their business and personal finances.” 

It’s much better to separate your business and personal finances from the beginning, even if you operate as a sole proprietorship. It’s even more critical if you have formed an LLC or corporation, as commingling finances can compromise the asset protection benefits of your business entity. 

In less than 30 minutes you can:

• Open a business checking account online
• Get a business credit card or charge card
• Request an Employer Identification Number (EIN) 

Each of these tasks helps you create separation between your personal finances and business finances, and will also make bookkeeping and taxes easier. Many lenders require business bank account statements to verify revenues, so you’ll also help make your business lender ready. 

2. Ignoring Cash Flow

A small business can make money— or even be profitable on paper— but still run into financial trouble if cash flow isn’t managed well. Cash flow provides a snapshot of your business’s real-time financial health. It highlights how much money is coming in and going out, and more importantly, when. 

When a business owner doesn’t carefully track cash flow, it can run into situations where bills are due before income from sales comes in, forcing the business to pay its bills late or even to go out of business. 

Good cash flow management helps you spot trends—like what’s selling fast and what’s not selling—and to make better decisions about where to invest time and money. Knowing when your business typically has cash surpluses or shortages can help you manage business expenses, plan sales or promotions, and make other key financial decisions. 

3. Spending Too Much Early On

While the startup stage can be stressful, it’s also exciting. Getting caught up in that excitement, it’s easy for entrepreneurs to overspend. Keep in mind that one of your crucial tasks in the beginning is to try to validate your business concept before committing significant resources. 

Overspending can lead to wasted investments in areas of your business that might not resonate with your market. By starting lean, you give your business the flexibility to pivot and adjust based on real-world feedback without being weighed down by sunk costs.

“Don’t you love watching the scrappy new business in your neighborhood grow and thrive?” SCORE mentor Carolyn Katz asks. “Be that guy. Start with just what you need to do one thing well. You’ll not only spend less, you’ll spend smarter, because your subsequent spending can follow the lead of what your customers want and care about.”

4. Starting Too Lean

Conversely, some businesses fail to adequately plan for their startup costs. There’s no single right answer to the question, “How much money do I need to start my business?” But it’s essential you think this through carefully or you risk running out of money before your business has time to find its market. 

“The biggest obstacle for small businesses is not having enough capital to start,” warns Lisha Garcia, Senior Certified Business Advisor with the UTSA Small Business Development Center. “They need enough capital so they have staying power as the market gets to know them.”

5. Avoiding All Debt

Many of us have been taught that debt is bad. And while it can be, for small business owners, a small business loan can also be an essential tool to help their business survive and grow. 

Whether it’s equipment financing that lets you get or upgrade an important piece of equipment, a line of credit that allows you to pay the bills while you collect from a client or bring in  revenue in from sales, using a business credit card to buy inventory at a deep discount, or a term loan that lets you expand into a new location or add a product line, debt can help you finance the next step in your business. 

The key isn’t to avoid debt entirely, but to approach it with a strategic mindset. Think of it as a tool in your business toolkit and find ways to use it wisely. Always make sure any debt you take on aligns with your business goals, and create a clear plan for paying it back. 

6. Not Creating an Emergency Fund

“Small businesses need a cash cushion,” says Katz. “Even those able to get a loan — and not all can — may well find that the process is too slow to help them when they need it.”

“Out of sight is out of mind: put whatever cash you can into a separate account whenever you can do so and you’ll soon have your own emergency fund,” she advises. 

A business savings account is a great way to set aside funds for that proverbial rainy day. 

7. Failing to be Plan the Unexpected

“Every business will find itself cash poor, even if the business is doing everything ‘right,” warns Katherine Pomerantz, accountant and money mentor. “Customer preferences can change, regulations change, unexpected expenses arise, or an opportunity will feel too good to pass up. Small business owners may struggle to adapt in unexpected circumstances like this and feel shame for their perceived failures.”

Pomerantz recommends business owners build contingencies into their financial planning and forecasting. 

“Luckily, this can be avoided by having a business plan and financial projections that prepare for cash difficulties,” she says. “By assigning money clear jobs like saving for tax liabilities, building up profit, and acquiring low-cost options for emergency cash like a business line of credit, a business owner can feel smart and secure instead of ashamed when the ‘unexpected’ finally happens to them.”

8. Poor Inventory Management

If your business sells products, managing inventory will be one of the keys to your success. Too much inventory, and your money is tied up in goods that aren’t generating any revenue. You may burn additional capital with storage fees and you may find the value of the inventory declines quickly. 

Too little inventory and you face running out of stock. Stockouts can frustrate customers and result in lost sales to your competitors. If stockouts happen too often, prospective customers may give up all together. 

A good inventory management system and inventory practices can help ensure smoother operations, better customer satisfaction, and improved financial health.

9. Getting Payroll Wrong

Of all the financial tasks in your business that you want to get right, payroll is at the top of the list. There are numerous things you must do to manage payroll correctly:

• Keep accurate records of time worked
• Properly classify employees and contractors
• Correctly withhold and pay payroll taxes
• Maintain records as required by law
• Keeping confidential information secure
• Comply with employment laws

While payroll might seem straightforward, especially if you don’t have many employees, there are myriad details that require attention and accuracy. “The never-ending battle of 1099 associates vs. being an employee lead this typical challenge,” warns Rita Mitchell, center director, USM Small Business Development Center.

Payroll services can make this crucial task easier, more efficient and accurate. 

10. Skimping on Insurance

Get the wrong business insurance and your business either won’t have necessary coverage when you need it, or will pay for coverage it doesn’t need. You may need business insurance to get certain types of contracts (including government contracts), or even certain types of loans. Look into:

• General liability insurance to help protect your business against lawsuits and common claims. 
• Business interruption insurance to help keep your business operational during certain types of events, like fires or floods. 
• Cyber liability insurance if your business is hacked or suffers a data breach. 
• Errors and omissions insurance for claims of negligence, mistakes, or failure to deliver services. 
• Unemployment insurance may be required if your business has employees. 

Talk to an insurance professional and review your coverage periodically to make sure your needs haven’t changed. 

11. Missing Tax Deadlines or Deductions

If your business makes money, you need to file tax returns. If you owe taxes, the IRS and state taxing authorities expect you to pay on time.  If you don’t set aside money for business taxes, you can end up with a big tax bill that you can’t afford to pay. Failing to pay taxes is one of the biggest— and most expensive— money mistakes a business can make.

Businesses often have myriad tax deductions available to them, but if you aren’t aware of them you may miss out. 

Saving for taxes is also a crucial part of this process.  “A quarterly accounting review is the best practice to keep year-end (especially October reconciliations) from being a profit-murderer,” Mitchell advises.

Using accounting software, staying up to date on your bookkeeping, and working with a tax professional makes it easier to understand your tax obligations. Set aside money for quarterly taxes if your business owes them. 

12. Overlooking Business Credit

Your business can have its own credit profile, just as you do personally. Strong business credit scores makes it easier to qualify for a wider range of financing products, and may also help your business land lucrative business deals or contracts. 

It’s not uncommon for well-established businesses that pay their bills on time to have poor business credit ratings. Why? Because they don’t have tradelines on their business credit reports. These accounts help build a business credit rating.

Learn how to establish business credit (it’s not hard), make sure you check your business credit regularly, and maintain at least a couple of accounts reporting on a regular basis. 

13. Not Investing Profits for Growth

Katz warns that it’s all too easy for businesses to get trapped in a “dead end business cycle” where “money’s coming in, you’re writing checks left and right, but you feel like you’re stuck on a hamster wheel.”

“You’ve got to know where you want to go,” she insists. “This doesn’t mean having a fancy business plan; it just means knowing your next objective. Then, prioritize your spending. After (paying expenses), you need to make your current business thrive, invest toward your goal or you may never get there.”

You’ve probably heard the expression, “You need to spend time on your business, not just in your business.” That’s also true of your business finances. Spend time thinking about your financial goals, and setting up the tools and systems you need to ensure financial success.