Being an entrepreneur is an extremely fulfilling career where you get to live your passion, challenge yourself daily and experience great freedom. While you may love running your business and focusing on your expertise, other aspects, especially the finance side may feel overwhelming. While you may way to avoid the finances of your business altogether, financial decisions can magnify your success in the short and long run.
Having a handle on the financial side of your business is incredibly important. An understanding of the numbers can maximize what you earn, protect you and your family and even keep you in business. Dedicate some time to your finances each month and I promise it will improve your business, reduce stress and save you unnecessary heartache. Here are five mistakes small business owners make with their finances and most importantly, how you can avoid them.
They combine their business and personal finances.
As a small business owner it can be really tempting to lump your personal finances in with your business finances. Many of your personal expenses are also business expenses and it might seem simpler to look at them both together. I highly recommend keeping your personal finances separate from your business finances for multiple reasons. If your personal and business expenses aren’t separate it makes it very difficult to see how your business is actually doing. Large personal expenses can make business earnings look smaller than they actually are and vice versa. It will also add a lot of unnecessary work at tax time!
They don’t pay themselves first.
Paying ourselves is another area where entrepreneurs struggle because often so much of what we make gets invested back into the business. At the end of the day, running a business is a job that you are doing so that you can make money. If you don’t pay yourself first and protect your financial future, no one else will do it for you. Take the time to set up the correct retirement options for you and your employees. Depending on your company structure you can set up a SEP IRA (Simplified Employee Pension Individual Retirement Arrangement), 401-K, Simple IRA (Individual Retirement Account) or defined benefit plan. Once you choose the correct structure for you, put it to work. Set up automatic contributions so that you are paying yourself each month. If it seems overwhelming, start small. You can contribute as little as 1% of your income and slowly work up from there. Some plans will increase your contributions automatically by whatever you choose over a specified period of time. If you increase you contribution percentage every month by 1%, you’ll be contributing 12% by the end of the first year and may hardly notice a change!
They don’t get started investing.
One of the most important ways you can reach your financial goals, retirement or otherwise, is to invest. Investing is a way to grow your savings so that you reach your goals more quickly while doing less work. While the wide world of investing can seem very daunting, it’s much more important to get started than to be perfect. We learn by doing, so no matter how much you read and research, nothing will compare with actually going through the process. Set aside a small amount of money to practice and you won’t regret it!
If you are ready to start investing, but aren’t sure where to start, check out the Savvy Investor course that starts on Tuesday. I’ll have you investing confidently and competently in 3 months, guaranteed.
They wing it when it comes to financial projections.
As an entrepreneur, you will want to create projections into the next year and even the next few years. What do you expect your company to earn in the coming months given what you know about your current business and potential new revenue? What can you expect to spend each month based on recurring bills, when annual expenses fall and new investments you will make in your business? Breaking down how many new customers you will need to achieve your revenue goals will help you put together a plan to make it happen. Also, if you know you have a large expense coming up, you can plan for it accordingly by saving cash for a certain period of time, creating a payment plan or getting access to financing. If the large expense comes up and you didn’t plan for it, you will have to scrape the means together quickly and may have to take on unfavorable and expensive financing terms.
They don’t have a monthly finance routine.
Bookkeeping is a very important practice for entrepreneurs. If you have the resources, this is something that you can also hire someone to do for a very reasonable fee. Bookkeeping just means keeping track of your income and expenses in an easy to reference way. There are various types of software available to help you do it, making it easy to see how much money you made and spent in a given month and even in a given category. You can track growth or decline in specific areas and revenue streams, however you prefer to look at your business. Also, you’d be surprised how much revenue companies lose by forgetting to collect on an invoice or by not following up with customers who have not yet paid. Losing money you’ve already earned is definitely something we all want to avoid!
Set aside time to focus on the money side of your business and you will be setting you and your business up for a bright future. While avoiding your finances altogether may feel easier at times, facing the numbers will help you create a plan for a successful business while also reducing your stress. The good news is that you don’t have to go at it alone. You have the option to hire wonderful professionals to help you make the right choices for you and your company. Don’t be afraid to use the resources available to you!