There are over 6.3 crores of Micro, Small and Medium Enterprises (MSMEs) in India. As India battles the pandemic wave and an average person realises the importance of being their boss, this number is just likely to increase. However, despite the steady increase of MSMEs, most business owners make the same financial mistakes.
The most common misperception is that financial problems arise due to business loan interest rates. However, that isn’t true. Financial problems for small business owners arise due to a lack of knowledge and understanding of the financial requirements of running a successful business. This lack of understanding often raises new challenges for business owners to tackle.
This article highlights the top seven financial mistakes that small business owners make and how to avoid them.
7 Financial Mistakes to Avoid
#1. Not separating personal and business finances
Businesses require specific accounts to manage their finances. One of the most common mistakes small business owners make when opening their account or taking a business loan is listing their personal accounts rather than their business accounts. This will blur the lines between your personal expenditure and that of your business.
There are several reasons why you shouldn’t mix personal and business finances. The most important ones are:
- It will make it difficult for you to estimate the business profit.
- It will be difficult for you to understand your personal financial health and that of your business.
- It increases the chances of being audited.
- The income tax filing and GST filing becomes difficult.
- It will affect your personal credit score.
#2. Not implementing an expense tracking system
Many business owners postpone implementing an expense tracking system. The reasoning behind this is often the same: My business isn’t large enough to justify a tracking system.
Unfortunately, this is a long-lasting financial mistake that can impact all aspects of your business. When you don’t have an expense tracking system, you cannot accurately estimate the influx of cash in your business.
Problems you’ll face.
- It is impossible to understand when you have made a profit and what will affect your business loan interest rates.
- It is difficult to estimate if you’ve spent more money than you should.
- It makes filing taxes at the end of the financial year difficult.
Most business owners don’t have an expense tracking system because they don’t understand bookkeeping and expense tracking. However, these services can be outsourced at affordable rates. Additionally, there is various software available that can be used to keep track of financial expenses.
#3. Making expenditures in advance
Another common mistake to avoid is making expenditures in advance. Small business owners anticipate larger contracts and partnerships in the future and buy equipment, tools, and materials in advance.
These are often deemed unnecessary purchases because they will not be used until you have signed a contract.
Most business owners obtain the finances for this by applying for a business loan and submitting their MSME loan documents. However, the time and money invested in this process will be wasted if you don’t get a contract.
Resisting the temptation to prepare in advance is a must for all business owners.
#4. Not having an emergency fund
As the past year has shown us, there is no financial security in the world. Most financial planners recommend setting up emergency funds for personal expenses.
The same should be done for an emergency fund. Small business owners often forgo saving money for their emergency fund by investing the money in stock markets or using it as operating finance.
However, not having an emergency fund for your business means you have to supplement the cash from the salaries of your employees, your personal finances or find a last-minute, high business loan interest rate.
None of these options can profit you in the long run. Saving enough money to cover three months’ worth of expenses in the emergency fund is crucial.
#5. Taking on unnecessary debt
As a continuation of the point mentioned above, most business owners take on business loans just because the interest rate is low. Often, they don’t need it, but because the interest rates are affordable, they opt to take on the unnecessary debt.
This isn’t limited to a business loan but also corresponds to credit cards. Incurring credit card debt is another common method of taking on unnecessary debt. Credit cards are simple and available but can put you in financial peril if they aren’t used with care.
#6. Not monitoring your credit score
Monitoring your business’ credit score is a necessity. Simply put, your business’ credit score is different from your personal credit score. The former can affect the latter if you don’t separate finances.
As you’re just starting, your credit score will make a significant difference in your business’s ability to find a good business loan interest rate.
Your business’ credit score shows its history. It helps lenders define reliability, payment terms, and other benefits you receive when you apply for a business loan. If you don’t monitor your credit score and maintain it, you may find it difficult to get a business loan in the future.
#7. Forgetting about sunk cost fallacy
Sunk cost fallacy is an expense that has been incurred but can’t be recovered. For example, as a small business owner, you have to pay fees to get the appropriate MSME documents and the registration of your business. In the beginning, these expenses can seem a lot. And these expenses can’t be recovered.
Business owners often fail to understand that they will incur some expenses that they can’t recover when they’re running a business. This often stops them from making large business decisions and taking healthy risks that could grow their business.
These are the top seven financial mistakes that small business owners make. Unlike what many people think, a business loan is not a financial mistake.
It can be an asset when you get it from a reliable source and get a good business loan interest rate. In such cases, ZipLoan can help out. We provide loans specifically for MSMEs. Visit our website to learn more about the financing options we provide.
Frequently Asked Questions
Financial mistake is not having a proper planning and lack of funds.
Here are some common financial mistakes:
1) Unnecessary Spending
2) Never-Ending Payments
3) Living on Borrowed Money
4) Buying a New Car
5) Spending Too Much on a Home
6) Misusing Home Equity
7) Living Paycheck to Paycheck
8) Not Investing in Retirement
Here are the steps to recover from your past financial mistakes.
Step 1: Estimate your monthly take-home income.
Step 2: Estimate your monthly expenses/Create a journal.
Step 3: Add up your income and expenses.
Step 4: Save, Save, Save!
A large amount of debt, a job loss or overtime reduction, medical bills, or simply being irresponsible with your spending could cause undue financial stress.
A smart finacial goal should be specific, measurable, action-oriented, realistic and have a timeline.