Five money mistakes you're probably making (and how to avoid them)

Barnaby Smith

There are certain skills and attributes that any small business owner can be assumed to possess. These include knowledge of their field, management ability, communication skills, and perhaps most crucially, financial expertise.

Yet despite sound money management being central for any business, an array of common financial missteps can afflict many budding enterprises.

Financial advisor and author Larissa Zimmerman recommends keeping the big picture in mind when considering money matters.

“Just like having the lid of a jigsaw puzzle so you can see the whole picture, you need to picture how you want your business to look,” she says. Here are five mistakes small businesses commonly make.

Insufficient capital

“Not having enough capital to get through the start-up phase is a common mistake,” says Zimmerman. “I’d suggest having three months of living expenses saved up, as well as the amount expected for the first three months of business expenses, as if no revenue will be received.”

Premature spending

Businesses should hold back on certain expenses until a secure financial footing is achieved.

Zimmerman warns against “spending big on business cards, sign writing, shop leases, cars, inventory or marketing materials before the revenue starts coming in”.

“Of course, if you’re in food or retail this may be hard to avoid. But professional and personal services can work from home initially, and you can always use virtual offices.”

You must have an accurate record-keeping system ... Ensure you record what you loan to the business.

Mixing personal and business finances

The line between personal and business money is easily blurred, but it is essential these are kept separate. This makes analysing profit and loss easier and is also helpful with accounting.

“You must have an accurate record-keeping system,” says Zimmerman. “Ensure you record what you loan to the business so when it makes money you can pay back the director’s loan before paying tax on the remaining profit.”

Waiting too long to seek loans

Some businesses wait until they are in financial trouble before applying for loans and credit – just when they are least likely to receive it. It is better to apply for funding when in decent financial shape, in order to be a better prospect for a bank or other lender.

“Borrowing at the right time, i.e. when cash flow suggests the opportunity to expand, works well,” says Zimmerman.

Poor risk management

It goes without saying that money can be saved by taking out adequate insurance and budgeting for unforeseen expenses. Zimmerman also recommends backing up data off-site – losing data can be costly as well as inconvenient. 

Barnaby Smith

Barnaby Smith is a writer and journalist who has written for a variety of publications across several subject areas in the UK, Australia and Switzerland.

Image: 'Bentley on the Move' by Ben, Flickr Creative Commons license