| By Laura Royer |
Running a small business is challenging most days, especially when it comes to making financial decisions. It’s one thing to be a master in your skill, product or service, and another to master all the financial decisions that must be made in your business. As a business financial coach, who helps other small business owners manage both their business and personal cash flow, I’ve found some common mistakes that many make with money. If you are a business owner or independent contractor, the following are six things that I recommend you address immediately in your business cash flow.
Whether it’s a bank account or credit card, do not use personal accounts for business expenses or business accounts to make personal transactions. This is a big no-no for many reasons, like taxes, overspending, misuse of funds and not seeing a separation in business and personal income. So many times, I’ve seen a business owner experience frustration with their cash flow, and a lot of it is because they do not have separation of financial transactions. Open separate accounts for business and personal use and only use the account for its intended purpose.
This is a common mistake with all business owners because they generally lack the patience to afford what they want to purchase for the business. If your strategy for spending money is hoping to just magically make more money before any effort has been made to make it, your risking your entire business on that one hope line. A general rule of thumb when it comes to reinvesting in is 10% of your gross profit. The benchmark doesn’t always work but I do recommend that you establish a guideline for your business and stick to it.
The adage, “you have to spend money to make money” may seem true, but it’s not always. There are many ways you can generate revenue without first borrowing it to leverage your financial capacity. Many businesses fail because they incur higher debt loads then they can pay back. So, if you are going to use credit to supplement your buying power, be sure to have a workable, proven revenue strategy that has already been tested, instead of creating something brand-new with the hope you’ll make the money back.
As a business owner, there will be many waves of revenue flow. Therefore, be sure to have a realistic budget for running the business and paying yourself a paycheck in the same, consistent manner. It may be tempting to pay yourself more during a month where your business knocked it out of the park, but if you do that, you may not have the money to cover your expenses in a slothful month. The rule is to have at least three to six months revenue in reserves to compensate for those slower seasons.
So many businesses simply go out of business because they mismanage the cash flow, and that is mostly due to not having a realistic, actional budget in place. Take the time to sit down and map out what your business needs are, including payroll, and create a budget around it. Check in (or hire someone to do this) weekly with the business cash flow to stay are target. Make any necessary adjustments to ensure a balanced monthly and annual budget is intact.
As a self-employed individual, it’s easy to forget about the tax obligations of running a business, especially if it’s just you on the payroll. However, many business owners get into trouble because they put off paying their taxes quarterly or on-time and either don’t have the money when its due or end up paying penalties. This happens from failing to set aside money for taxes each time the business make money and sending it in to the IRS. If this is an area that you struggle with in your business, then hire an accountant or bookkeeper to manage your books for you so you can focus on what you do best – your business product or service.
Laura Royer is the Founder of Catch Your Money. She offers business and financial coaching services. To set up a free discovery call she can be reached at Laura@catchyourmoney.com.