5 Money Mistakes Small Businesses Make and How to Avoid Them

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Today, we're diving into something very important for all you business owners out there - the top 5 money mistakes small businesses make, and of course, how to avoid them.

So, the first money mistake that small businesses make is...

#1 – Not Having a Budget

Imagine going on a road trip without a map. You might get lost, right? That's what happens to small businesses when they don't have a budget. No Plan Means, No Direction.

Without a budget, small businesses can't plan where their money should go, and they might end up spending it on the wrong things.

Now, think of a shopping trip without a list. You might end up buying a lot of stuff you don't need!

This is what happens when small businesses don't budget. Spending can get out of control. They might spend too much money on things they don't really need and run out of money for the important stuff, they really need. A budget helps keeps everything in check, just like a shopping list.

Without a budget, a small business might not save any money. Then, if something unexpected happens, like a broken computer, they might be in big trouble. A budget also helps put some money away, in the event of surprises.

Without a budget, a business might find it tricky to make big decisions because they don't know what they can and can’t afford. Knowing what's available makes those choices a whole lot easier.

I can tell you from my personal experience, private and public entities, that manage money, like school districts, townhouse associations, whatever, they all have and work off of a budget.

For them, it’s required by their rules that they need to follow. So take note for your business. Have a budget.

Mistake #2 – Mixing Personal and Business Money

Mixing personal and business money can lead to serious confusion. Everything Gets Confused. By not separating these funds, it becomes difficult to track what money is being used for the business and what’s being used personally. This lack of clarity can lead to problems and potential mistakes.

Taxes can also become complicated when personal and business funds are combined. This creates potential tax problems.

It's critical to keep accurate records for tax purposes, and mixing personal and business money can create confusion, which can lead to errors.

Maybe you’re using your personal credit card for your business. But when you need to track those expenses for your business, you’re probably going to miss some of those expenses.

 Keep them separate, and you can avoid all that.

I won’t get into the legal aspect of it, because I’m not a lawyer, but there’s thing called “piercing the corporate veil”. And basically, if you’re mixing your personal and business finances, and you have a separate business entity… You can invalidate your legal protections for that entity.

By keeping personal and business money separate, a business can run better and more effectively. 

Mistake #3 that businesses often make is not saving money for taxes, and that’s a big problem.

Think of it like saving up for something you really want to buy; if you don't save enough, you can't get it. If a business doesn't save enough for taxes, it can run out of money when the tax bill comes. This might lead to needing money in a hurry, causing other problems.

Just like paying a late fee for a library book, not paying taxes on time might result in extra fees such as penalties and interest. It can also cause stress and worry for the business owner.

So, saving for taxes is a must! It helps a business have enough money when the tax bill comes due, it helps to avoid penalties and interest, reduces stress, and lots of other things.

Mistake #4 – Neglecting Your Bookkeeping

Neglecting your bookkeeping is like ignoring the chores you need to do around the house; eventually, things pile up and get real messy.

When a business doesn't pay attention to its bookkeeping, it loses track of where its money is going and coming from. This can create a big mess that's hard to clean up. Keeping accurate records of sales, expenses, and other financial details is essential for understanding how the business is doing.

Without proper bookkeeping, it's tough to make smart decisions about spending, saving, or growing the business. Mistakes in bookkeeping can also lead to trouble with taxes, legal issues, or even running out of money.

By staying on top of bookkeeping, a business can plan better, avoid mistakes, and keep things in order, setting itself up for success in the future.

Mistake #5 – Not Filing Your Tax Returns on Time

Not filing tax returns on time is like missing the bus; once you're late, it's hard to catch up.

When a business doesn't file its tax returns on time, it can lead to a lot of problems. First, there might be expensive late filing penalties and interest, and these costs can quickly add up, even to the point where your original tax due amount doubles.

Second, being late with taxes can cause stress and worry, making it harder for the owner to focus on other tasks, like, running the business.

Finally, not filing on time can make the government take a closer look at the business, which nobody wants.

By filing tax returns on time, a business avoids all these problems, keeps its finances in good shape, and can focus on growing and succeeding.

It's a simple step that makes a big difference in keeping the business running smoothly and staying out of trouble.

So get out your calendar, and mark those filing deadlines, and make a conscious effort to not be late with filing your tax returns.

Thanks for reading and see you in the next blog post!

About The Author

Noel Lorenzana is an Illinois-licensed, Registered Certified Public Accountant with over 20 plus years of experience.

Through his online educational content, YouTube videos, easy-to-understand courses and 1-on-1 consulting, he gives you the tools to become tax savvy for yourself. 

Disclaimer: Any accounting, business or tax advice contained in this article, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.