4 Financial Management Mistakes That Hinder Small Businesses

Small business ownership is the ultimate dream for millions across the globe, but for a vast majority of budding entrepreneurs, this dream can very quickly turn into a nightmare. With as many as 20% of small businesses failing within their first year of operations, and a whopping 50% not making it past year 5, success in business is an exception, rather than the norm.

There are innumerable factors that send promising new businesses to an early grave, but none so egregious as financial mismanagement. In this article, we cover some common financial management mistakes that small businesses and startups continue to make, and they can overcome the same.

1. Inadequate Cash Flow Management

Cash flow is the lifeblood of any business, more so than profitability in the case of small, up-and-coming startups. If your business runs into cash flow problems, either as a result of poor planning and forecasting, or unexpected expenses that eat into your liquidity, you will either have to settle for expensive short-term borrowing, or in the worst case, be forced to shut down operations entirely.

This is often the result of businesses trying to punch above their weight, that is, trying to do too much with limited resources, often referred to as ‘Overtrading.’ As such, it is suggested to regularly analyze cash flow statements and ensure that a business has enough liquidity to cover short-term concerns.

2. Neglecting Financial Records

According to a recent study by Clutch, as much as 45% of small businesses don’t employ a bookkeeper or an accountant. This might seem cost-effective, or even unnecessary during the initial stages of a business, but the lack of accurate record-keeping only serves to increase costs and instances of financial mismanagement in the long run.

Accurate bookkeeping helps with more than just record keeping and tax assessments, it helps business owners identify profitable areas, promising prospects, as well as the laggards, which is key for effective decision making.

3. Lack of Budgeting & Forecasting

As many as 29% of startups and small businesses fail, simply because they run out of capital before their ventures turn viable and become sustainable. This largely comes down to a lack of budgeting and forecasting among small businesses, which often make the mistake of handling and planning their operations one day at a time, completely losing sight of the longer game.

Without such robust forecasting and budgeting measures in place, businesses will often have nothing to rally their plans and strategies around, leaving teams, workers, and even entrepreneurs themselves in the lurch, especially when faced with challenging situations.

Fortunately, you can enhance your finance management by leaps and bounds with templates from Vena, and other similar services that offer simple and easy-to-use templates that don’t have any substantial learning curve to master.

4. Ignoring Tax Obligations

According to the IRS, small businesses pay $1,162 per year in penalties on an average, for the late payment of Federal taxes. It goes without saying that this weighs heavily on the finances of companies, especially those that are still finding their footing.

In addition to this, companies that fail to keep track of their tax obligations often end up in a perilous liquidity position during that time of the year, being forced to either opt for more expensive sources of funds, or curtail operations and expansions, in order to fund their obligations.

Final Words

Avoiding these financial management mistakes can put your small business on the path to success. Remember, a healthy financial status isn’t just about profit margins; it’s about intelligent money management. 

Consider seeking advice from financial experts or investing in financial management tools to ensure your business thrives. In conclusion, the journey of entrepreneurship can be a challenging one, but it’s also immensely rewarding. 

By steering clear of these common financial pitfalls, you can focus on what you do best – growing your small business. After all, every big business was once a small business that made smart financial decisions.