Starting a small business comes with many challenges, many of which are due to a lack of experience, unfortunate circumstances and operating on a shoestring budget. The hard lessons every entrepreneur learns early on are nearly impossible to avoid.

This article highlights common financial mistakes made by small business owners, which can help you avoid these costly pitfalls.

Mixing Personal and Business Finances

Failure to separate your finances makes it harder to monitor your business’s cash flow and keep precise records — which are needed to secure loans, help with tax filings and have a clear understanding of the financial health of your business.

Ineffective Cash Flow Management

Closely monitoring your business's cash flow is a crucial aspect of running your business. It ensures timely bill payments, identifies money drains and pinpoints areas of surplus or shortage.

Impulsive Spending Early On

Starting a business is exciting, but finances are always tight in the beginning. Curb your poor spending practices and only purchase the absolute essentials for your business.

Not Creating an Emergency Fund

Ask yourself: If a financial disaster hit your business today, would you have enough cash on hand to stay afloat? Start planning an emergency fund if you haven’t already done so.

Starting with Low Working Capital

A business must be able to cover at least three to six months of operating costs when it first opens. Even though business owners plan for a lot of routine expenses, many fail to anticipate the various unexpected costs that come with building a business. If you find yourself pulling from your business savings account or emergency fund for basic expenses, you likely started with too little funding.

Inadequate Planning

A business plan is the most essential aspect of growing a business from scratch. Not having a detailed blueprint for how your business will function breeds financial irresponsibility, disorganization and turmoil. Many owners think they only need a plan to attract funding, but it serves to set a clear direction and vision.

Ignoring Numbers When Things Are Good

It is easy to get caught up in the excitement when business is booming. Some entrepreneurs lose the urgency to manage finances responsibly and get a little loose with spending. Don’t fall for this trap, and always stay sharp on your finances because you never know when things may go south.

Weak or Neglected Budgeting Practices

A business that doesn’t have a budget is asking for trouble. Lackadaisical financial tracking leads to irresponsible spending and makes it difficult to evaluate the economic health of your business. Budgeting helps you keep track of how much your business can spend, which can help you appropriately allocate money for different expenses and savings.

Poor Inventory Management

It’s challenging for most businesses to keep track of their supplies, but it is necessary to achieve financial efficiency. Too much inventory means you spend too much money, and you could even lose money if it perishes — such as food — or if it is damaged or stolen. Keeping too little inventory and running out of stock can make your business seem unreliable to your consumers, and you could lose them for good.

Getting Payroll Wrong

It is very easy to make payroll mistakes. Mishaps in paying your employees can lead to penalties from the IRS, costing you even more money. In fairness to the financial health of your business and your employees, take steps to ensure you have a robust system in place.

Skimping on Insurance

Not securing adequate insurance coverage for your business can be devastating. Ensure you are getting the best value for your policy, and never pay lower rates to save money, as you may be forfeiting necessary coverage.

Ignoring Crucial Financial Statements
There are four important financial statements every business should keep track of: cash flow, income, balance sheet and owner’s equity. Neglecting to organize and keep track of these statements will cause you to spend money irresponsibly and hinder your ability to evaluate the financial health of your business.

Avoiding All Debt

Both in business and in life, there is a stigma around incurring debt. Instead of being scared off by others’ misfortunes or mismanagement, understand and manage loans responsibly, as it can fuel growth.

Poor Tax Planning

Calculate your taxes quarterly to ensure accurate payments. Pay close attention to how much you owe in taxes based on your business’s location, size and revenue. Stay on top of your deadlines and look out for tax deductions that are available to you.

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