Finance is considered to be the backbone of startups. Without small business financing, no business can expand its operations or even survive in the market. Yes, everything ends up at the startup budget. In order to launch a successful small business, entrepreneurs are always in need of money. They explore different sources and channels to raise funds for their startup businesses or to improve their startup’s financial health. But when they raise money and utilize these funds to run business operations, they often make a variety of financial mistakes. These mistakes negatively impact business performance (increase in expenditures) and eventually small firms have to rely on a low Net Profit Margin.
So, here the question arises why small businesses often make financial mistakes? Well, to be honest, the majority of Entrepreneurs lack financial planning skills. They intentionally or sometimes unintentionally make these money mistakes that create serious financial problems for their small businesses. Well, without further ado, if you’re a small business owner and running a business then you must avoid these mistakes in order to enjoy high net profit margins. All you need to explore and read the following list of “5 common financial mistakes with their solutions”.
Five Avoidable Financial Mistakes
1). TAX OVERPAYMENTS
We know that all types of businesses are legally and socially responsible to pay taxes to federal and provincial tax authorities. These taxes are used by the governments to improve the deprived sectors of society. From a business perspective, it is really a good aspect of corporate responsibility. But sometimes, payments of taxes can cause a serious financial problem for businesses in terms of increase in non-operating expenses as well as cash outflows. Some businesses simply overpay their taxes just because of a lack of tax information, mismanagement in expenses or complex system of tax codes. You can avoid this mistake by
Creating a strong check and balance on cash receipts
Keeping eye on the latest tax ratios available on governmental taxation websites
Asking for tax relief claims / rebates from tax authorities if available
Hiring independent contractors instead of employees
Deducting all the irrelevant expenses to increase the EBIAT (Earnings Before Interests After Taxes)
2). HIGH SPENDING IN STARTUP PHASE
No doubt, money is required to bear the initial expenditures of a startup. Even spending on certain things is mandatory, including business registration, patents, trademarks, website registration and hosting, and acquisition of business supplies or infrastructure etc. But sometimes, small business owners make a financial mistake and spend their business funds on unproductive activities such as parties for friends & office staff, tours, or buying luxury items for a small scale business. This spending can increase the administrative expenses of business. In order to avoid this financial mistake, you must scrutinize your expenses. You need to check and select the costs / expenses which are supposed to be beneficial for the business.
3). SPENDING LIKE BUSINESS RIVALS
Established and profitable businesses usually spend more money than newly launched businesses. Due to a large market share, they often enjoy high sales and revenues. So, they spend more funds on marketing to expand their business operations. But if you’ve recently launched a business and are spending money to compete than you must stop here. You’re making a serious financial mistake. You need to select an innovative medium and channels through which you can advertise your business and grab the attention of customers.
Content Marketing, Video Marketing and Social Media Marketing are considered to be the best online marketing techniques for small businesses. You can also use these mediums to save your extra costs. On the other hand, you should pay attention and think about the business profitability before remuneration and hiring. As your business will grow, you can increase your spending.
4). INVESTMENT DIVERSIFICATION
As the business grows, entrepreneurs often look forward to the future “how they can invest more and earn more in future?” Rather than investing in their own business, they often decide to diversify their investment. They put their money in other businesses or purchase equity shares in order to enjoy high returns or dividends on it.
Investment diversification is actually a wise step to expand the business but if you’re thinking about this option than hold on. Before you invest your savings or earned business income, you should ask yourself why you are doing this. You should check and analyze the past business performance and growth rate, in which you want to invest your money. If the host business seems to be financially sound then you can take risk otherwise there are high chances exist you’ll lose your money.
5). USE OF CREDIT CARDS
Using Credit Cards to make business payments is not bad thing, its normal. Even, it is a convenient way to make instant payments to sellers. But keep in mind, living and purchasing on borrowed money can double your business expenses. The reason is, credit card companies usually charge high interest rate on their credit services. According to the Forbes, “credit cards are making the business persons irresponsible”. They spend more money at restaurants and shopping malls. At the end of the month, credit card users will have to repay the borrowed amount (principal) plus interest to credit card companies.
In all of the above mentioned financial mistakes, it is considered to be the worst financial mistake that entrepreneurs make all the time. So, if you’re running a business then it is highly recommended that you should use debit card rather than credit card. Using debit card can make you responsible business person. You will keep eye on your spending and the remaining balance.
You can avoid these common financial mistakes by paying high attention toward all the small business transaction details. Before you spend, you need to check and scrutinize your each penny, whether it is mandatory and beneficial for the business or not. You can make your business profitable as much as you can avoid these mistakes. Good Luck!
Adil Zaman is a freelance writer, business major and founder of Fincyte. He loves to write on Small Business and Tech Trends.
Email: [email protected]