3 Financial Mistakes that Can Break a Small Business

You might be surprised to find that many small businesses go bankrupt because business owners overlook small details or get overextended in some way. Are you making any of these potentially fatal financial mistakes?

Poor Accounting

Good accounting works for businesses. When a record reflects business data accurately, business leaders are better equipped to budget and plan for the future. Accurate data can pinpoint discrepancies, such as employee theft; and it can also reveal areas of opportunity, such as underperforming departments or lower than average margins. Also, good accounting keeps businesses in line with IRS demands.

When a business’s books are in disarray, there is an underlying risk of calamity. Payroll taxes could go unpaid; employee theft can go unnoticed; and any forecasting or planning is based on a fragmented understanding of accounts.

Business owners who are unfamiliar with accounting and bookkeeping practices should hire an accountant or professional bookkeeper to maintain records. However, all business owners should take the initiative to learn basic accounting practices in order to personally check records to reduce the threat of employee theft. Internal theft accounts for almost one-third of all business bankruptcies in the U.S.

Hiring the Wrong People at the Wrong Time

Good business leaders know how to match talent to task, but there is also the question of timing. Many small businesses struggle during growth spurts to accommodate increasing customer demand and to pay new staff members. The lag between increased staff and increased cash flow can often result in lay-offs or even bankruptcy. The old idiom, “Don’t count your money until it is in the bank” comes into play here, and business owners need to be cautious about over-hiring in anticipation of increased business.

Let the budget be your hiring guide when adding new hires to the payroll. Keep in mind that expensive overhead personnel who do not contribute to the bottom line can also be drains on the budget. Consolidate tasks or outsource as often as possible to avoid hiring unnecessary team members until your budget can allow for more overhead costs.

Maintaining your existing staff is also a great way to save money and promote and establish an internal community and culture. The amount of time spent to recruit, interview and train new employees comes at a substantial cost to your business; and that is not to mention the learning curve of customer service or employee practices that will affect your bottom line when you hire new talent. Losing seasoned workers can also result in customer loss, lower credibility and disrupted morale of your existing team.

Lack of Credit Control

Currently, banks are extremely cautious about lending money to businesses, which means some businesses rely on credit cards for startup costs. Debt-financed businesses should always include interest rates when budgeting for monthly payments and costs associated with loans and credit card payments.

However, the recession hasn’t just made it more difficult for businesses to receive loans. Some businesses are experiencing problems with customers and clients who are unable to pay for services on time. When a business cannot collect receivables, projected cash flow and lost time/inventory take a large chunk out of profitability. Even though it may seem like the best business practice to extend credit to clients, if a business can’t absorb the losses produced by the failure of a credit-backed project or commitment, the choice is clear: don’t do it.

Stella Walker is a successful independent business owner who contributes to creditscore.net. When she’s not writing, Stella can usually be found at the farmers’ market, gathering fresh ingredients for her bakery’s famous muffins. Stella welcomes your comments and questions below.

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