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Common Financial Mistakes in Small Business and How to Avoid Them

Many small business owners make mistakes over the course of their business ventures. But financial mistakes tend to be the most costly. By knowing what the most common financial mistakes are, you can actively avoid making them.

Most Common Mistakes

Not Sticking to a Budget

The first mistake many small business owners make is not sticking to a budget. It’s important to have a written plan in place that states what you expect your revenue to be, the expenses that are anticipated, and any other costs of doing business. This budget should outline how much money is needed for each line item (rent, utilities, supplies) and should be updated monthly.

Not Separating Personal and Business Finances

It is important to maintain a separation of personal and business finances. When you don’t, it can lead to some major issues down the line. You may find yourself in trouble with the IRS if they notice that you’re claiming deductions for personal expenses on your tax return or vice versa. This can result in an audit, fines, and jail time if you’re found guilty of fraud.

Not Having a System for Tracking Expenses

One of the most common mistakes made by small business owners is not having a system for tracking expenses. This could be anything from receipts to credit card statements to invoices.

Not Registering as the Right Entity for Your Business

If you’re not sure what type of entity is best for your company, consult an attorney or visit the IRS website to find out more about legally setting up a business in your state. Of all of the entities you have to choose from, LLCs and S corps are popular options for new business owners.

LLCs have several advantages, including limited liability, tax advantages, less paperwork, and flexibility. When registering your LLC with the state, it’s important to understand your state’s laws regarding LLCs. A Missouri S corporation saves you money on self-employment taxes and business losses, since you can file them as deductions on your taxes. Whether you choose an LLC, S corporation, or other entity type for your business, you should consider hiring a business formation service to file your paperwork, as this will be more cost-effective than a lawyer. 

Steps to Avoid These Mistakes

Small business owners are often so busy running their operations they neglect to address the business side of things. One common mistake made by small businesses is not sticking to a budget. You may think that since you’re starting small, you don’t need to worry about budgeting, but it’s the most important thing for your business.

Another mistake made by small businesses is not separating personal and business finances. This is crucial because if something goes wrong with your personal life, it can have a significant effect on your business.

Sometimes business owners have a system for tracking expenses but forget about other expenses like taxes or insurance premiums - these are also very important and must be taken into account when managing your finances. 

Another common mistake made by small companies is incurring too much debt. When this happens, there’s more paperwork, time spent worrying about how to pay off debt, and potentially legal consequences if you can’t repay what you owe. 

Lastly, some people run their businesses without ever considering the tax obligations they’ll be faced with in the future—which can cause them problems down the line if they don’t plan ahead for those obligations.

Join the Park Hills-Leadington Chamber of Commerce for great resources that will help you grow your business locally and beyond.

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