You probably already know that losing money is far easier than earning it. Running a business — even a one-person shop — and making money is not for the faint of heart. It takes a lot of work; you have to love what you do to have a shot at being successful. And when we work this hard and put so much of ourselves into what we do, it hurts that much more when we realize we’ve made a financial mistake and lost money.
Whether you’re new to business or have had your business open for years, there are ample opportunities to make poor financial decisions at every turn. Unfortunately, making financial mistakes is common for businesses of all sizes and types. And most of the time, you won’t even know you’re doing it until it has already impacted your bottom line.
The good news is you’re not alone. Talk to almost anyone who’s been in business for more than a minute, and ask if they’ve made a mistake regarding financial decisions. I assure you they will say, “Yes.” They say being forewarned is being forearmed, so here are four common bookkeeping mistakes that can cause you to lose money in your business, and what you can do to avoid them.
Top Bookkeeping Mistakes
Mistake 1: Running a Business Without a Budget
Unplanned spending is one of the biggest startup mistakes I see, which is precisely why you need to have a budget in place. I know, nobody likes the word “BUDGET.” It sounds restrictive and boring and just not fun! You worked hard to earn your money; why shouldn’t you be able to spend it any way you want?
You’re absolutely right – it is your money, and you can spend it any way you want. But guess what? A budget will allow you to do just that!
Have you ever gotten paid for a bigger job and then splurged on something as a reward, only to find yourself struggling to pay your taxes a few months later? Budgeting encourages you to avoid reckless spending and enables you to make your money work FOR you and your business — not against it.
Pro Tip 1: Let go of the idea that budgeting is restricting, and embrace the benefits of not blowing all your hard earned money on something you really didn’t need.
Mistake 2: Not Focusing on Cash Flow
Cash flow is the lifeblood of your business. Knowing when the money flows in and when and how much needs to flow back out is the secret to restful nights and business enjoyment. Many business owners neglect to pay close enough attention to cash flow, resulting in some sticky situations. Putting a system in place to monitor cash flow at all times is one of the best things you can do for the financial health of your business. While it might not be the sexiest aspect of running a business, it’s one of those things you simply can’t ignore for too long.
Pro Tip 2: To stay on top of things, you’ll want to continuously monitor your cash flow, track expenses, and analyze sales, accounts receivable, and other shortfalls.
Mistake 3: Not Preparing for a Rainy Day
Just as with your personal finances, it’s essential to save for a rainy day. From bigger emergencies like recessions and pandemics to the more mundane ones, like equipment failures and unexpected repairs, you never know when a little extra cash could save the day.
Start a savings account for your business; the sooner, the better. Slowly build a reserve that’ll help your business thrive. The easiest way to do this is to automatically transfer a set amount from your operating account to your business savings account every week or month. That way if — or when — the unexpected happens, you’ll be much more prepared financially.
Pro Tip 3: Decide on an amount and frequency that feels feasible, and then commit to it. You can always increase it or decrease it as needed after a while, but something is better than nothing!
Mistake 4: Making Big Purchases Early in the Business
Buying all the shiny things for your business can be tempting, especially in the beginning. Social media can trick us into thinking that, to be successful, we need that brand new top-of-the-line widget (equipment, seminar, website, software). Sure, sometimes you might actually need that widget, but more often than not, you can make what you already have work to your advantage.
Be sure to carefully review your buying decisions, especially when there is tight cash flow. Always ask yourself if a big expense will help you strategically grow your business and generate more revenue or if it’s just something cool that caught your eye.
Pro Tip 4: Look at the three mistakes above to help you evaluate whether or not now is a good time to make that purchase or investment. You can also ask yourself the following questions to help make the best decision when purchasing expensive items for your business:
- Did you budget for this purchase? If not, can you budget it for some time in the near future?
- How will this purchase affect your cash flow if you buy it right now? What if you waited until next month, next quarter, or next year?
- Will this purchase negatively affect your ability to add to your savings account?
- Will this purchase save you a significant amount of time or money almost immediately?
Don’t Make These Common Mistakes
A single financial mistake can be the cause of your business failure. But you can avoid these common financial mistakes and set your business up for success by following the tips above! It just takes a little planning and may require some assistance from a professional.
Why make these mistakes knowing what you now know? Need help getting your finances in order? We can help. Schedule a call today!