How to avoid the financial traps many small businesses fall into

30 June 2022
How to Avoid the Common Financial Traps That Many Small Businesses Fall Into

Gust Post: courtesy of Alyssa Strickland. Image from Pexels.

Finances are one of those things that many small business owners grapple with, partly because they have their plates full of the many responsibilities that come with running a business. Here are some helpful tips on how you can avoid some of these common financial traps so that your business can thrive in the long term.

Keeping your personal and business expenses separate from each other

Keeping your business and personal finances separate is one of those time-consuming exercises that one simply must do in the beginning to keep an eye on what is happening to one’s finances on the whole. Furthermore, it is vital to open a separate business bank account for legal reasons too so that you can claim back tax deductions where applicable, obtain a loan for your business or apply for credit. From a cash flow perspective, you’ll have a clearer indication of what expenses are going out and coming in so that you can clearly see what profit you’re making. Also, having a separate business bank account will ensure that the business structure you choose (as in the case of an LLC) is noted as a separate legal entity to prevent you, yourself, from being held liable for business debts. 

Not sticking to a budget

Not having a budget in place is like trying to manage your finances with your eyes closed. Moreover, a budget can help you manage and allocate your expenses better to ensure your business expenditure is always less than the money coming in. Avoiding this financial trap will ensure that you not only have enough funds to meet current expenses but future expenses too. Also, these extra funds will be needed for reinvestment purposes to sow back into your business as your business grows, especially during those phases where it experiences quick growth spurts, and you need access to extra funds quickly. 

Monitor your cash flow

Your cash flow status is another critical component of running a business successfully because you’ll need to have sufficient funds available at all times to meet your short-term expenses. Failure to do so is classic financial trap and could have a knock-on effect on other areas of your business, such as not being able to pay your suppliers on time, which would impact your inventory levels negatively. This, in turn, will prevent you from having enough supply to meet demand, affecting your return on investment and profit at the end of the day. 

A cloud-based invoicing solution could assist you in getting paid on time so that you can meet your expenses timeously by automating the invoicing process so that your customers can view and pay invoices online quickly and conveniently as well as streamlining the process better by notifying you when invoices are viewed and paid and scheduling recurring invoices so that you don’t have to manually do so. 

Investing too much in your inventory

On the other hand, your business can also suffer the effects of having too much inventory on hand if you don’t have sufficient demand to support this. What happens then is that the majority of your capital is then tied up in stock, which could prevent you from being able to meet other expenses in time. 

You don’t have the requisite insurance

Not having the right insurance or too little insurance could see your business suffering hardships in more ways than one. For example, if your business were to encounter a natural disaster, you could lose your business, your machinery and equipment, and all the money you invested in it in one fell swoop: hence, why having the proper insurance is so vital. Of the three types of insurance worth investing in, auto, health, and liability insurance are three of the most common (and most valid) business insurances that are designed to protect your business and yourself if something unfortunate were to happen. 

A lack of an emergency fund

Murphy’s Law happens to the best of us – regardless of how careful we’ve been in the planning process to take every possibility into account; hence, another financial trap to easily fall into is not realizing that it’s absolutely necessary to have some savings on hand to cover unexpected expenses that may crop up at the most inconvenient of times. Generally, you’ll want to aim to have at least three months’ worth of savings available so that you aren’t left panicking thinking about how you’ll be able to get the funds you need to meet these expenses. 

Monitor your savings

Many people go into business to obtain more financial freedom for themselves and their families. Moreover, you can end up generating quite a bit of profit if you run your business cost-efficiently. However, it’s vital to build up a nest egg that you can reinvest for your retirement one day or create passive income through other means such as investing in stocks, etc. Certainly, Exirio can make monitoring your wealth in different streams easier so that you can pinpoint where your wealth is growing. 

Choosing the right business structure

The right business structure for your business should be carefully considered, as the type of business structure you choose could have long-term implications for your business should you decide to expand in the future. Moreover, the wrong business structure could prevent you from doing this and doing this quickly if it doesn’t have this element of flexibility. Furthermore, most lending institutions will require your business to have its own identity if you were to approach them for a loan. In addition to personal protection, you also have the opportunity to claim back certain tax deductibles that could go a long way in reducing any debts you are obliged to pay. 

At the end of the day, financial freedom can only be obtained if you are diligent about your business finances on a daily basis and smart about how you manage your available income so that your business expenses don’t land up in the red.

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