Avoid these 8 common small business pitfalls to stay strong in any climate
It’s a tough world out there for small businesses. In addition to trying to manage everything yourself, you are often strapped for cash, low on resources, and constantly bombarded by customer complaints, emails from business partners, requests from vendors, and a life outside of work.
On top of everything else, the world of small business financials can seem like a minefield. Think we’re being too pessimistic? We could spout off statistics about how many businesses fail in their first year (20%) or why they fail (82% fail due to cash flow problems) but today we’re focused on what businesses like yours can do. Not what other businesses didn’t.
Below, you’ll find a few resources and real-life examples to help you overcome the common financial pitfalls crippling many small businesses today.
“Beware of little expenses. A small leak will sink a great ship.”
– Benjamin Franklin
Pitfall #1: Neglecting to Monitor Cash Flow
We can say the famous mantra Cash is King until we’re blue in the face, but it won’t do any good unless it becomes real to you and your business.
Your business will fail if you do not use scrutiny when monitoring your cash flow. This could encompass almost everything discussed below, as nearly every business action affects cash flow.
Pitfall #2: Not expecting the unexpected
We live in uncertain times. Natural disasters seem more common these days. Nobody could have predicted the tariff hikes seen in 2019 as a result of the US trade war with China. It goes without saying, many small businesses are not prepared for unexpected expenses. If this sounds like you, take heart: you’re not alone.
So how do you prepare? How do you expect the unexpected? You can weather the storm by having funds reserved for emergency use. You don’t know what it will be for, but keep cash available. Bad things happen and often they happen all at the same time. After all, the phrase “when it rains, it pours” was coined by a small business owner. (That’s actually not true. It was created by Morton Salt Company as an ad to sell salt. But it certainly seems true!)
Pitfall #3: Blurring the line between personal & business expenses
This is a culprit on every list of small business financial pitfalls. Make it a habit from the start to clearly define the line between your business financials and personal finances. Make the line a chasm, if you can.
A murky situation with muddled personal expenses, business receipts, credit card charges, and blended phone bills is messy. It creates headaches for everybody involved. Use any number of apps designed to track business expenses and keep these separate from your personal expenses.
Pitfall #4: Overspending on the Unnecessary & Neglecting the Critical
It can be tempting to spend money on tech gadgets, monthly subscription services delivering plants to your office, or fancy Keto-friendly business lunches. This must be avoided.
You should spend money only on the items critical to the success of your small business. Be conservative when it comes to extras, but spend when it comes to critical ongoing business concerns.
For example, spend the money to do a thorough background check on a new bookkeeping hire. They will be in control of your financials. Make sure they are reliable.
Pitfall #5: Amassing large amounts of credit card debt
Just don’t do it. You shouldn’t have started a small business if you have to rely on credit card debt to stay afloat. Use credit cards responsibly. Charge only what you can pay in full at the end of the month. Under no circumstances should you leave a balance on your credit card that accumulates interest.
Instead take out a line of credit or use short-term loans.
Pitfall #7: Insufficient budgeting and lack of long-term vision
You cannot operate a business without monitoring a budget. Likely, you had to create a proposed budget to secure start-up financing. Let’s hope you’ve looked at it since then!
Small businesses need to build a routine around budgeting. Compare the estimated budget prepared at the start of the year and actual numbers at the end of the year. If you routinely have discrepancies, look into the variances and figure out what is causing your problem. Making this a habit is the easiest way to prevent problems in the future.