Most Common Financial Errors Small Businesses Make

Running and growing a small business is hard enough
without making simple financial mistakes you kick
yourself for after the fact. Consulting with an
accountant or attorney who is experienced in the
finances of a small company can help you avoid most
common errors. But the following types of mistakes are
often overlooked, even by the pros.

by Jeffrey Moses

1. Taking on and keeping overly expensive debt. Most
growing companies need to take on some amount of debt
to fund growth, but debt at exorbitant interest rates
is often called "the wrong kind" of debt. What is the
"wrong" kind? The following would make the list: credit
card debt, car-dealership vehicle loans/leases,
personal loans at high rates, etc. But in reality, the
wrong kind of debt should be thought of as any debt
that either is not necessary or that can be refinanced
at terms that are more favorable. Plan to systematically
review every outstanding loan and try to find a way to
either pay it off (without compromising growth, of course)
or refinance at a lower rate.

If you have expensive debt (such as credit card
balances), consider discussing the situation with your
banker or other lender. If your company is profitable —
or is showing strong signs of coming profitability —
it’s likely they will work with you to refinance at a
lower rate. Don’t think of this as a favor they are
doing for you. Rather, think of it as good business for
the lender. They’re in business to make money from
loans. If you bring a good credit history and a viable
business record to them, they’ll seriously consider
lending you money and getting you out of the
unnecessarily high payments you’re making. Doing so
will make your company all the more profitable.

2. Not having enough cash reserves. Even companies that
work closely with conservative business advisers make
this mistake. A company should make all efforts to have
enough cash reserves to pay bills, salaries and other
expenses for several months (or longer, ideally) during
cash-flow fluctuations.

3. Not having "key-man" life insurance on principals
and key employees. If your company should lose one of
the people who make the difference between success and
failure, you would need to be financially covered while
you made up lost ground and found a replacement.

4. Being underinsured for potential risks. It’s simple
to insure property, but what about potential
liabilities such as lawsuits? Work with your insurance
agent to make sure you’re covered for all curves your
particular type of industry can send your way.

5. Not having a comprehensive business plan for new
products or service offerings. Don’t go into a new
venture with vague financial "predictions." All new
ventures should be based on sound, conservative
projections.

6. Putting money into new products or ventures too late
into the "regional growth curve." If all your local
competitors are already offering a particular product
or service, you may have a hard time taking customers
away from them when your company brings the product or
service online. Don’t fall behind the curve. Keep your
eyes open to what competitors are doing. It’s usually
not necessary to be first out with a new concept, in
fact, that can often lead to excessive expenses as you
educate the public on the benefits provided. But don’t
be the last company to offer the service. All your
potential customers will already be committed to one of
your competitors.

The exception to this is on the retail level,
especially for products or services that customers need
repeatedly.

7. Finally, the most common financial mistake that most
small-business owners make: not putting enough aside
for your own retirement. Sole proprietors need to put
something aside from every check they receive. (It’s
called Pay Yourself First, and is one of the cardinal
rules of running your own business.) Owners with
employees need to put something aside for their own
retirement monthly or quarterly. Don’t wait for the end
of the year to add to your retirement accounts. Small,
regular deposits throughout the year are much easier
and more practical.

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