Nobody said running a business would be easy, and you're bound to make mistakes from time to time. However, the number of mistakes that cost your business money can be greatly reduced if you correct them quickly and learn from others who have made them in the past. Following are 10 common mistakes that entrepreneurs have made over and over again. If you can either prevent or correct them, you should be able to run a more successful operation.
1. Not separating personal income from business income
It's very important to keep your personal finances separate from your business finances. Of course, you pay yourself a salary and you may wish to invest some of it into your business, but there should still be a clear line between personal and business finances.
Make sure to have both a business checking account and a personal checking account so that you physically have to keep these different funds separate. The same goes for credit cards. Maintain a business credit card in addition to any personal cards you might carry. It's also a good idea to use recordkeeping software specifically for your business. When it's time to file taxes, this will all help illustrate to the IRS that you are in fact running a business, even it’s a one-person operation.
2. Confusing profit and cash flow
Profit is not the same as cash flow, and thinking of them as the same is a big mistake.1
As Asit Sharma at The Motley Fool writes, "Enjoyment of a profitable month on paper can quickly turn to pain if that profit gets tied up in receivables that take inordinate amounts of time to collect. Lacking the working capital solutions that large corporations can access, small businesses must optimize the time it takes to fulfill obligations under a sale, and collect and deposit money into company coffers at a brisk clip."2
Be sure to keep close tabs on accounts receivable and do your best to ensure customers are able to pay you quickly before doing business with them.3
3. Spending more than you should
It may seem obvious that when it comes to business expenses, you need to make sure that you're not spending more than you're earning, but sometimes that's easier said than done. Review your expenses and try to reduce them where it makes sense. Think of expenses as investments, and if the investments aren't worth what they're costing you, drop them.4 Consider whether they will actually help you grow your business. Do your best to make sure that the money you spend is matched or exceeded by your revenue.
4. Not knowing what your biggest expenses are
If you review your expenses as mentioned above, this should make itself clear quickly, but it's imperative that you know what your biggest expenses are and address them accordingly. Are you overpaying for certain services? Can you get a similar service for less from a different provider? Does the provider you already use offer a cheaper plan that will suffice for your needs? Do your homework and eliminate extra costs that aren't really benefitting your business.
5. Waiting too long to seek credit
A big mistake that businesses make is waiting too long to seek credit. In other words, they wait until they need it, which can make it harder to get. Seek business credit while your business is prospering as you'll be more likely to have more available to you. Then, when you need it, you'll have it (and more of it) to help you get through rough patches.
6. Being lax with recordkeeping
Business owners can easily let their record-keeping habits get out of control when they have so many hats to wear, but being lax with recordkeeping is a big mistake. As mentioned, keeping close tabs on your accounts receivable is an important part of understanding your cash flow, but clear, ongoing recordkeeping helps you understand the true state your business is in at all times. It can also help you at tax time, or if you get audited by a taxing authority.
7. Not filing taxes quarterly
Some business owners make the mistake of waiting to file taxes annually, but this can lead to a major hit on your cash flow, which can put a strain on your business. The smart thing to do is to file your taxes quarterly so you never have to get in over your head. It's never a fun expense to pay, but that is exactly how you should look at it – as an expense that is due every three months.
8. Not taking advantage of tax deductions
Speaking of taxes, make sure you're taking advantage of all the deductions that are available to you. If your taxes are an expense, then just like with other expenses, you should evaluate and figure out if there are ways for you to pay less. Common deductions can include: vehicles, salaries and contract wages, property rent, depreciation, business supplies, utilities, repairs, insurance, commissions, advertising, home office, etc.5 The list goes on. Do your research, and talk to your accountant to get a comprehensive look at what all you can be deducting, and take advantage accordingly.
9. Not keeping up with market changes
A big mistake from the business model perspective is not keeping up with the times. Markets change, and remaining stagnant while technologies and competitors evolve may cost you customers, which can ultimately lead to the demise of your business. Make sure you keep abreast of your market by reading articles, attending conferences, and networking with others in your field. If a major change is in the wind, prepare yourself for it as much as possible. Keeping up with market changes can become costly, but it's a critical investment. You don’t want to be stuck selling video tapes when everyone else is selling Blu-Rays.
10. Not hiring the right people
Finally, not hiring the right people is a very costly mistake. It's a difficult thing to get right, but it pays to put as much effort as possible into recruiting and retaining the best people for the job. Training can get expensive (especially if the position is a revolving door), and every time you have to put that money toward paying someone to learn the job, that's money that could be used elsewhere to further advance your business. Hiring the wrong person and keeping them around can also damage your business in other ways. If the employee is unqualified or unmotivated, they're not going to do the work you need done.
Mistakes can cost your business money, but if you can address these 10 items effectively, you'll be in a better position to enjoy success in the future.
1. Click here for a NevadaSmallBusiness.com article on managing cash flow.
3. Click here for a NevadaSmallBusiness.com article on how to set up credit policies for your business.
4. Click here for a NevadaSmallBusiness.com article on the top 10 business money wasters.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A.