This article is for educational purposes and does not constitute legal, employment, or tax advice. For specific advice applicable to your business, please contact a professional.
There are a few common financial mistakes small business owners might make that could be avoided with the right planning and tools. Here are a few money mistakes to keep your eyes on as we start off the new year.
Mixing business and personal accounts
Many small business owners are first-time entrepreneurs which means that personal and business accounts can be confusing. However, mixing business and personal accounts for business transactions or funds can lead to cash flow management and tax issues. It is also recommended that you don’t use your business credit card or debit card for personal expenses.
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It can affect taxes: According to the UK government, business owners can only deduct business expenses, so if you run your expenses through your personal bank account it will be hard for HMRC to determine if your business is a hobby or a company. This could open your business up to serious risks if audited.
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It can affect your credit score: Credit reference agencies track your business’s credit much like a personal credit score. By keeping the accounts separate and paying bills on time, you can build your business credit. Using a business account for personal use or vice versa can reflect in your credit score.
Not managing cash flow
Operating a business comes with risk, but by managing cash flow closely you can plan better for the future. Cash flow management is the process of tracking how much money is going in and out of your business. By keeping an eye on cash flow, you can better manage your debts, like paying employees, suppliers and more. Many small business owners worry about amassing too much debt too quickly — here are a few common pitfalls that may contribute to this:
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Making large purchases for your business: If you’re looking to reinvest in your business, you may want to hold off on large purchases without projecting the potential ROI. Purchasing an espresso machine to serve customers coffee might bring in more revenue, for example, but it will also tie up your cash temporarily. You can maintain better control of your cash flow by being careful to not overspend on any unnecessary startup costs. As your business grows, you’ll be able to reinvest more and more into your business.
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Incurring credit card debt with the expectation of possible future revenue: Similarly, you may want to invest in marketing or inventory ahead of seasonal occurrences. But by making purchases with no guaranteed return on investment, you’re exposing your business to some risk.
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Not leaving any buffer room/emergency fund money: Having a certain amount of liquid cash set aside for emergencies can protect you against unexpected expenses.
Be aware of changing tax guidelines
Before you know it, the end of the year is already here and it is time to file taxes. When it comes to the end of the fiscal year, planning ahead can help you save money:
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Planning for taxes as an employer: Employers should expect to deposit taxes they withhold. Another common tax mistake is misclassifying workers, so owners should make sure to file accordingly, classifying workers as contractors or full-time employees.
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Planning for taxes if you have employees: Employers should expect to deposit taxes they withhold. Another common tax mistake is misclassifying workers, so owners should make sure to file accordingly, classifying workers as contractors or full-time employees.
Failure to pay taxes properly results in penalties, so keeping track of taxes both quarterly and for the end of the fiscal year can help you avoid any tax surprises and having to consult a tax professional.
Lacking business insurance
Business insurance can help mitigate financial risk in unforeseen events. There are many different options when it comes to small business insurance. A few different types of business insurance to consider after speaking to an insurance provider, depending on the type of business you operate, are:
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Public liability insurance (insurance that provides protection against claims from injuries and damage to property or people)
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Employers liability insurance (insurance that protects you against claims made by employees against you)
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Professional indemnity insurance (insurance that protects your business against potential costs of a client seeking compensation from your business)
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Buildings and contents (insurance that covers your business property from flooding, fire and theft)
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Stock insurance (insures against theft or damage to stock)
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Business owner’s policy (insurance covering tools, machinery and computers)
Many small business owners have limited cash liquidity and irregular cash flow. The combination of a small cash buffer and irregular cash flow can contribute to financial issues. Employing some of these tools to avoid financial mistakes can help you better plan ahead and give you some room to make mistakes and cover unexpected expenses.