5 Financial Mistakes That Hurt Small Businesses

When getting your small business off the ground, small financial errors can have a huge impact on the success and profitability of your business down the road. How you’re handling your finances shouldn’t be an afterthought; financial planning is essential to keeping your company in business. The best way to start planning is knowing what not to do so you can get your business off on the right foot.

Not Hiring the Right People

Every small business owner dreams of building the perfect team that will help them skyrocket to success, but recruiting the right talent takes time. Small businesses first starting out usually have a limited budget, which means getting strategic with hiring decisions is more important than ever.

The first hiring mistake is recruiting family and friends for the wrong reasons. It may be tempting to want to help out a relative or friend looking for a job, but unless they’re truly the right person for the position, you’re putting your business at risk. In these situations, ensure that you review a friend or family member as you would any other candidate and consult their references.

Many small businesses also make the mistake of hiring too many people at once. Rather than hiring employees that only specialize in one business function, consider searching for candidates that can take on multiple roles or try outsourcing certain responsibilities such as web design or payroll services.

Mixing Personal and Business Financial Assets

For many small business owners, your business is your pride and joy, and you’ll do almost anything to make sure it’s thriving. However, drawing on your personal assets to finance your business puts you at risk in the event that your business is not as profitable as you had imagined.

Relying on personal assets such as savings, personal credit cards, or home equity loans means potentially losing your savings, paying high interest rates, or losing your home. Rather than using personal funds, taking out a small business loan is a much smarter approach to getting the financial support you need without risking your personal assets.

Not Having an Emergency Fund

Even the most successful and profitable businesses need a backup plan. No small business is invulnerable to situations that might put a hitch in profitability. Events such as natural disasters, drastic increases in materials costs, or bad publicity could pop up at any moment, causing unforeseen expenses. Having emergency resources to support these events prevents your business from taking a huge financial hit or possibly having to shut down.

It’s recommended to set up an emergency fund that covers your business operating expenses for at least three months. You can calculate this by adding up your company’s payroll, property expenses, and other bills for each month to find out how much you should have to protect your business.

Failing to Pay Payroll Taxes

Small businesses are required to withhold federal and state taxes from their employees’ paychecks within a certain time frame. Failure to pay these taxes on time (or at all) has major consequences including financial penalties, audits, and in severe cases, imprisonment.

Calculating payroll taxes and keeping track of when to pay them can seem like daunting tasks for small businesses just starting up, but nonetheless should not be ignored. For small businesses lacking the time or resources to handle payroll taxes themselves, outsourcing payroll responsibilities is a great option for ensuring taxes are calculated correctly and paid on time.

Not Consulting Financial Professionals

The biggest financial mistake any small business can do is failing to seek out professional financial help when they need it. Many small business owners think they can handle all of their company’s finances on their own, but this just isn’t realistic. While hiring a CFO may not be in the budget, outsourcing financial services is a smart way to get the financial expertise you need without hiring a full-time employee.

In addition to having the option to outsource financial duties such as bookkeeping and accounting, you can also seek out accounting firms that offer CFO services such as financial planning, cash flow management, and guidance on acquisitions, debt financing, and budgeting. Having a financial expert to consult ensures you’re making the right choices with your business assets while giving you the time to focus on the business itself.

Making mistakes is part of every good learning experience, but there’s no need to risk the profitability of your business by mishandling your finances. With some strategic financial thinking and the right resources in place, you can focus on improving your business.