5 Big Money Mistakes Small Business Owners Make

In America, small businesses make up 99.7% of all businesses. Unfortunately, this is one of the good statistics when it comes to small business success. The majority of small businesses fail within the first two years and 29% of those business fail because they run out of cash. This article will cover 5 money mistakes that small business owners make and how you can avoid them.

1. Being unprepared for a rainy day

There's a saying that every business has a winter season where things just are not going right. You can't seem to get over a slow season and the bills are starting to pile up. You have vendors and employees to pay but not capital to do so. Many business owners are optimistic when it comes to the success of their business but fail to put a "worst case scenario" plan together. It is a good idea to have 6 months of business expenses saved before making any major financial changes to your business.

2. Not separating business and personal finances

From the second you earn money for your services, you’re a small business owner. Freelancer, consultant, entrepreneur, solopreneur: These are just titles that we use to distinguish our roles, but at the end of the day, when you’ve got income you’re declaring on a 1099, you need a separate bank account.

You don’t even have to set up a business account to begin with; a checking account that you will only use for transactions involving your business ventures will be enough in the beginning. You want to be able to keep track of every penny coming and going related to your business. When you do finally incorporate, and when tax time rolls around, you’ll have a clear ledger without your personal expenses complicating your business finances.

3. No financial business plan

Many business owners do not create a business plan because they are not raising capital at the moment. A business plan should be treated as a road map to your businesses success, without it our direction and decisions in business may be skewed. The plan should be telling the financial story from your business: past, present, and future. If you’re just starting out, you want to include a prospective financial outlook for the next five years. Set goals for quarterly and even monthly projects to keep yourself accountable in the first year.

4. Not planning for tax liability

When it comes to taxes hire a professional. It is easy as a small business owner to put of your taxes until April because we have so many other things going on RIGHT NOW that we need to take care of. The easiest way to stay on top of your tax liability is to pay quarterly taxes on your income. You’ll also want to get familiar with state- and industry-specific taxes that’ll impact your small business.

5. Not taking on debt properly

The vast majority of small business owners start by bootstrapping. Pinching pennies when they can and reducing their cost of doing business. There’s a great deal of satisfaction to be found in pursuing your passion without going into debt. However, it’s a mistake to rely on bootstrapping as your only strategy for growth. Bootstrapping helps you hit the ground running but it doesn’t necessarily keep the business going or growing. Small business owners obviously underestimate the importance of cash flow: 82 percent of business failures are due to poor cash flow management.Going into debt can be scary, but not as scary as having a bank balance that’s so far in the red you’re not sure when you’ll recover. Taking out a loan for your business doesn’t have to mean a monumental amount of money. If you’ve laid out a good budget, with expectations for the expected output (and revenue) for your business, you can take out a loan that’s a perfect fit for helping you achieve your business goals.In fact, taking out a loan to create a solid cash flow cushion for your business is a great way to ensure that you can pay yourself and in turn, reinvest in the business.