Avoid These Small Business Financial Traps
January 26, 2017
Small business success is dependent upon many factors. Some factors, however, are more challenging than others for a small business especially when it involves financial management. Whether it's securing capital, separating personal finances from business finances, or managing cash flow, there are a number of traps that many small businesses are not adequately prepared to handle. Consider the following six tips on how to avoid financial traps that can negatively affect a small business.
1. No cash reserves. The lack of cash reserves is a major hindrance for many small businesses. Startup costs may be relatively small depending on the business, but negative cash flow during the initial stages is quite common. Until the business becomes cash flow positive, sufficient cash reserves must be estimated and available for the business to properly manage current obligations.
2. No forecast of cash flow needs. Predicting future cash flow needs and building sufficient cash reserves for operations go hand-in-hand. Without properly estimating future cash flow needs, a small business does not know the adequate amount of reserves to maintain. Cash flow budgets and projections are necessities for small business management.
3. Borrowing. Small businesses must be disciplined when borrowing money and creating other forms of debt such as purchasing on credit cards or leasing equipment. There must be a margin of safety between borrowing and debt servicing. Many times, it is easier to borrow than to repay. When a small business becomes overextended regarding debt, catching up can be difficult and at times impossible.
4. Control business spending. It is imperative for small businesses to determine which purchases are absolutely necessary, and which ones are not. Luxury purchases for a small business can be costly in terms of negative cash flow and increased debt.
5. No comingling of business and personal finances. Comingling personal and business finances is a recipe for disaster in a small business. Although a sole proprietorship may be taxed along with the owner’s other forms of income, a small business should still be treated as a distinct entity keeping business and personal finances completely separate – separate checking accounts, separate billing for expenses, separate everything.
6. No advice from professionals. Professional advice, whether in the form of a small business consulting, financial, or tax advice, can help a small business avoid financial issues. Small businesses should concentrate on what they know how to do best and leave the rest to knowledgeable pros.
Association of Accredited Small Business Consultants