For Small Businesses: Avoiding Common Financial Mistakes

Experience is the best teacher. But, even if the experience is not yours, you can learn a lot, too. This is why you attend seminars or undergo executive leadership coaching so that you can learn from other people who have proven success in a field.

However, sometimes, other people’s bad experiences and failures are great at teaching, too. In any craft or venture you are to enter, always look around you for warning signs. This can save you from a ton of tears and regrets.

Case in point, when you start your small business, make sure you look for advice or stories from people with experience — both negative and positive. Especially when it comes to finances, you can’t be too careful. If you have no one to ask, you are in luck. Here are some of the finance mistakes newbies make. Try to avoid them at all costs.

1. Not making a comprehensive inventory

When you first start your business, you are both anxious and excited about it. But, don’t let the emotions distract you from keeping a comprehensive inventory. This list is simply a lifesaver. It keeps you from buying too much or stocking too little.

Classic inventory management requires only two things: pen and paper. All you need to do is list down all product and order details. How many items do you have for each specific product? Count everything. Then, you should also keep a list of all orders.

The remaining stocks and the number of orders must match. When you don’t keep an inventory, you risk unknowingly losing money on expired, damaged, or lost supplies. It will also help you track if you are making money. It is one way of tracking money in and money out.

If you don’t like the idea of manually listing down things, you can always use spreadsheets. Or take it a notch higher and invest in other sophisticated inventory management software. To make it easier, schedule regular inventory in short periods, say every week or bimonthly.

keeping inventory

2. Not separating business and personal funds

Even married couples should have their own bank accounts each. So, never think that it’s okay to keep your money from different sources altogether in one place. By having one bank account for all your business transactions, you get to keep track of your cash flow.

Aside from tracking your finances, a business bank account is necessary for multiple practical reasons. One, the Internal Revenue Service (IRS) requires that you have one. As soon as you make transactions as a business, you have to use this account for all transactions.

Another good reason is if you plan to take out a business loan down the road. You cannot be granted a loan if you don’t have your own business bank account since they need to deposit the money in a business account. It’s your business bank account that lenders will peruse to see if your financial records are clean.

If you plan to sell online, you can only accept credit card payments if you have a business bank account. If you are in the eCommerce field, you need to have one.

3. Not having an emergency fund

Driving your car all the time means you need to have a spare tire. In this regard, personal and business finance don’t differ. Both require you to have an emergency fund in case anything goes south.

There will be instances when you have to cover an emergency expense. It could be lost or damaged products or a sudden increase in supplies. You could also use this fund when sales drop and you need to keep paying for your business needs. Or in the case of the last two years, a global pandemic.

Because of the uncertainty of the times, just like what happened a year ago, you could be paying rent while no money comes in. Or you might need to give aid to employees. Whatever it is, you need to be ready for the rainy days.

Use your business bank account to deposit a set amount of money regularly. It could be monthly or weekly. It’s up to you, as long as the fund gets filled. By doing so, you lessen the risk of being derailed by a potential financial setback down the road.

These are the basics of business finance that you need to know. Before you set out on a small business journey, it would help if you are personally a financially literate person. When you can manage your own finances, chances are you will not be thrown off by tasks like managing inventories and tracking cash flow.

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