5 Financial Mistakes to Avoid as a Business Owner

Starting your own business presents a new form of stress that you didn't experience as an employee of an established company. Instead of simply being responsible for your single role, you are now in charge of operations, accounting, marketing, sales, and IT, all while trying to bring in new business and keep customers satisfied. It's challenging and overwhelming, yet rewarding. 

Like any successful business owner, you are bound to make mistakes. But if you can learn from others and minimize those mistakes, the more likely you are to stick with it and see the fruits of your labor.

Here are 5 financial mistakes to avoid when starting your business: 

1) Not setting up the right business structure

As you're well aware, there are various entity structures available for setting up your business, for both legal and tax purposes. From a legal perspective, structure matters because it dictates the level of personal protection you have in the case your business were to ever get sued. Sole proprietorship and partnerships don't offer any personal protection, where other entities like an LLC or C-corp protect personal assets from liability. 

These various entities are also taxed differently. For instance, you'll be required to pay self-employment taxes on all income from your LLC, but if that entity is taxed as an S-corp, that's not the case; however, under an S-corp, you are required to take a "reasonable salary" which will impact the amount of self-employment taxes you pay. Which entity structure is right for you depends on many factors, which can be thoroughly evaluated by a qualified tax professional. 

All that is to say, not setting up your entity under the appropriate structure can result in significant legal and tax consequences (obviously, these consequences become more meaningful with the more money your business makes). While you may be able to get some generic advice from Google, you are much better of hiring a business attorney and CPA who can help you evaluate your unique situation. This can save you a fortune in the long run. 

2) Neglecting business insurance

While it would be nice to have a crystal ball that could help you anticipate all of the accidents your business will encounter, sadly, that is not possible. And that's why insurance exists.

Most small businesses should have some type of insurance coverage (depending on the industry):

Property insurance

Liability insurance

Business auto insurance

Worker's compensation insurance

Errors and omissions insurance/professional liability

Directors and officers liability insurance

Key employee insurance

• Property insurance

• Liability insurance

• Business auto insurance

• Worker's compensation insurance

• Errors and omissions insurance/professional liability

• Directors and officers liability insurance

• Key employee insurance

While it may seem like an unnecessary expense because "it'll never happen", the monthly premiums could be the difference between staying in business or going under. Insurance exists for a reason…because accidents happen. Nobody thinks it would happen to them. And not having an adequate insurance policy could result in you having to pay thousands of dollars out of pocket, which your new business may not be able to afford. 

All that is to say, don't cheap out on insurance because you think you're exempt from bad luck. Accidents happen. And the small price you'd pay for premiums could save your business in the long run.  

3) Ignoring Cash Flows

It sounds obvious, but you'd be surprised how many business owners don't have a strong grasp on where they stand from a cash flow position at any given time. As a business owner, you're busy running the business. You may not have time to check the monthly cash inflows and outflows. You don't spend time projecting out the month/year/quarter, but you have a "rough" idea of how much the business is bringing in and how much you're spending. 

This may work for a period of time, but eventually, this can backfire. As discussed above, sometimes accidents happen. Unexpected emergencies arise (that aren't covered by insurance) that require a big cash outflow. Worse yet, there may be months where cash inflow takes a big hit (for example, during the COVID pandemic). If this happens, and cash isn't available to meet the needs of the business, your business credit may be negatively impacted. This can be a real issue when trying to apply for credit or a loan. 

While you can't predict events like a pandemic, you can take steps to make sure that your business can meet immediate and unexpected cash needs. This is where having a part-time accountant or assistant can really be helpful. If you can't afford that, set aside a little time each week to review your cash flows to avoid any unnecessary impact on your business credit. 

4) Not outsourcing

When cash flows are tight, the tendency for many business owners is to take on more work themselves instead of hiring out. For instance, accounting & bookkeeping is a function that many business owners just manage themselves. And while there is a benefit to understanding the financials (as mentioned above), preparing the monthly journal entries and financial statements is a time-consuming task that can be cost-efficiently outsourced. 

Outsourcing anything that is not in your wheelhouse, whether it be accounting, IT, marketing, social media, etc. can be a massive time-saver in the long run. 

More often than not, business owners try to save money by taking on the work themselves, but because it's not what they're good at, they spend so much more time on it than an outsourced professional would. This takes away more time from where you, as the owner, are best-suited, thereby hurting business growth in the long run. Find what you're best at and outsource the rest. A business thrives when everyone is in the right seat. 

5) Ignoring the Sunk Cost Fallacy

The sunk cost fallacy is the idea that, because you've invested so much time and energy into something, you must continue pursuing it. You have probably encountered this feeling at some point, even if it's something as trivial as a home repair project that's beyond your expertise. You invested a whole weekend of your time and three trips to Home Depot, so you feel like you have to keep going, even though you clearly have no idea what you're doing.

This same thing happens all the time when building a business. Owners will invest time and resources to develop a new product or service and will continue investing time and resources into those projects, even though they are unsuccessful. That's not to say you should walk away after the first sign of failure, but continuing to invest money into a project that isn't working can put you out of business. 

This is why it's important to know when to keep going and when to throw in the towel. Just because you've "sunk cost" into a project does not mean you have to continue sinking money into it. Sometimes, closing the doors on one idea may just save your business, providing you the opportunity to pursue your next great idea. 

So whether you're just starting your business or have been in business for years, take a step back and consider how you can learn from the mistakes of others in order to build a prosperous future for your business.