By Yhordan Serpentini | January 6, 2022
In the world of business, we are bound to run into several obstacles that can make a serious impact on our companies. One of these obstacles, and unfortunately being where many entrepreneurs fail, is financial pitfalls. From underestimating costs to failing to diversify investments, it can be difficult to know how to properly manage your finances. So how do we prepare for these pitfalls, or avoid them altogether? Today, we will discuss five common financial pitfalls for small businesses and provide strategies for avoiding them.
1. Failing To Budget Properly
Running a small business can be an exciting and rewarding experience, but it can also come with a lot of financial pitfalls if you’re not careful. One of the most important things you can do to protect your business’ finances is to create a budget and stick to it. You may have heard this tip hundreds of times by now, but if you’re hearing it often, it is probably something you should consider—for good reason too. A budget can help you track expenses, measure profitability, and monitor cash flow, failing to have one or failing to use one efficiently can have serious consequences.
One of the most crucial things to add to your budget is emergency money and money for taxes; this means setting aside some of your profits for when tax season rolls in, as many entrepreneurs tend to save little or no profits at all. This isn’t just a good strategy for business, but for any individual’s financial needs, as doing so will save you from having to pay a hefty tax bill at the end of the year. Additionally, having money saved for any emergencies or unexpected fees can be the difference between bankruptcy and stability.
It’s also important to invest in yourself and your business’ growth, too. Investing in yourself can help you acquire the knowledge and skills necessary to succeed. Investing in your business can help you expand, upgrade operations, and create a more successful business. Diversifying your investments is a great way to spread risk and protect your assets, as well as avoid financial pitfalls.
2. Lack of Competition research
Not researching the competition can be a major financial pitfall that could cost your business dearly, but it can be avoided by better educating yourself and understanding the type of competition(s) you’re up against. Start by researching the competition in your area. Look at the services they offer and what their prices are like. Analyze their strengths and weaknesses to identify any areas where you can gain an advantage. You should also try to identify any potential customers who are already loyal to your competition.
Once you have gathered all the data, you can develop a strategy to differentiate your business from the competition. Look for ways to stand out from the crowd by offering better products, services, or prices. Utilize your strengths to create a unique selling proposition and make sure your business is a clear choice for potential customers.
3. Not Having Sufficient Capital
It’s no secret that having sufficient capital is essential for any business. Without enough capital, businesses may struggle to pay for overhead costs, salaries, taxes, and insurance—not to mention unexpected expenses. This is why it’s detrimental to have a plan in place to ensure adequate capital when starting a business.
First and foremost, it’s essential to understand the true cost of running the business. This means taking into account all overhead, salaries, taxes, and insurance—the last thing you want to do is underestimate just how expensive being a small business owner truly is. Many entrepreneurs underestimate the amount of money needed to get the business up and running—which leads to their companies struggling or shutting down early—so it’s important to do your research and get an accurate picture of the costs.
Having a plan for unexpected expenses is also key. As mentioned earlier, setting aside a cash reserve to cover short-term needs can come in handy if the business experiences any hiccups along the way. Additionally, government assistance programs, such as grants and low-interest loans, can provide much-needed capital to help businesses get off the ground. Small business owners should consider additional sources of financing. Crowdfunding, angel investors, and venture capitalists are all potential sources of capital that can help businesses grow and succeed.
4. Not Setting Up The Right Legal Structure
When setting up your business, it’s crucial to consider the implications of each structure. A sole proprietorship may be ideal for a single-person business as it offers the greatest flexibility, but it also comes with the greatest risks. A partnership is an ideal structure if you have a business partner, but it can be difficult to dissolve if the relationship goes sour. An LLC or corporation offers the most protection but requires more paperwork and complexity.
It’s important to seek legal counsel if needed to make sure the structure you choose is right for your business. Talk to an attorney to ensure you’re setting up your business correctly, and take advantage of resources like the Small Business Administration to help you get started. Not setting up the right legal structure can, and in most cases does, kill off your business.
5. Failing To Protect Against Data Theft & Cybercrime
If your business is mostly or exclusively digital, then you are increasingly vulnerable to cybercrime and data theft. Even so, with so much of our lives and our businesses now conducted online, having proper awareness of the potential risks and taking steps to protect yourself and your customers’ data, will help you avoid lawsuits and other financial pitfalls. The first step in protecting your business from cybercrime and data theft is to invest in cybersecurity solutions. This can include anything from firewalls and antivirus software to encryption and password protection. All of these measures can help to shield your business from potential threats.
You should also make sure that all of your software and systems are secure and up-to-date. Outdated and vulnerable systems can leave your data open to attack. Regularly review your data security and update any software or systems that are no longer secure. It’s important to create a comprehensive data protection plan for your business and regularly review it. This should include everything from the cyber security measures mentioned above to employee training, data backup, and disaster recovery plans.
If you or your business are struggling with financial pitfalls and aren’t sure how to proceed, we at Jaeli Capital Consulting can help you. For more information about what we are and what we do to help you, visit our home page, or our Jaeli tools.
Disclaimer: This blog is not intended for financial advice
Sources:
- Nethi, M. (2022, September 16). 6 financial mistakes that will destroy your business. Entrepreneur. Retrieved January 6, 2023, from https://www.entrepreneur.com/growing-a-business/6-financial-mistakes-that-will-destroy-your-business/435182
- Williams, S. (2022, October 13). 10 common financial mistakes that can hurt your business. Viva Capital – Business Invoice Factoring. Retrieved January 6, 2023, from https://vivacf.net/insights/common-business-financial-mistakes/
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