Looking to run your small business long-term?
You’re not alone.
The vast majority of small business owners think they have their finances handled. Except…the statistics prove otherwise. Data from the U.S. Bureau of Labor Statistics shows around 20% of businesses fail in their first year alone. Within five years of opening, 50% of small businesses are no longer operating.
But here’s the good news:
Most small business failures are preventable. Sure, there are outside factors that come into play. But most come down to common money mistakes business owners make again and again.
What you’re about to discover
Why Money Mistakes Can Be Fatal for Small Businesses
5 Financial Mistakes that Keep Repeaters Running
How Streamlined Filing Compliance Procedures Can Save Your Business
Easy ways you can avoid losing your shirt
Why Money Mistakes Can Sink Your Small Business
Let’s kick things off with a hard truth…
Making money mistakes doesn’t just mean losing money. It can mean the end of your business entirely.
Case in point: poor cash flow management is cited as the cause of failure for a majority of small businesses.
But it doesn’t stop there.
Failure to implement streamlined filing compliance procedures also leads to unnecessary penalties, audits, and legal fees. This is particularly important for business owners with foreign accounts. Failure to comply with IRS FBAR filing requirements can seriously derail your financial obligations. Falling behind on tax compliance is one of the quickest ways to financially ruin your business.
And don’t think the IRS will take it easy on you…
In FY 2024 alone the IRS levied $84.1 billion in civil penalties against individual, estate and trust income tax returns. Small businesses that fail to file or don’t file correctly find themselves facing steep penalties that can quickly spiral out of control.
Say your business is late to file by a month. The late filing penalty will be 5% of your unpaid taxes. Add on a late payment penalty of 0.5% on top of that. Not too bad, right?
Except each of these penalties stacks monthly until they max out at 25%. So if your business was a few months late, you’d be sitting at around 45% in penalties. Paid directly out of your business.
Small business owners often don’t realize how important streamlined filing compliance procedures are until it’s too late. Taking the time to create systems for keeping track of deadlines, organizing documentation and filing on time is one of the best financial investments you can make.
5 Financial Mistakes That Keep Businesses From Growing
Okay, now that the tough stuff is out of the way. Let’s talk about the actual money mistakes that get business owners in trouble.
These are by far the most common…
Commingle Personal and Business Finances
Trying to manage personal finances and business finances in the same place is a disaster waiting to happen. At best it makes tax time stressful. At worst it lands you in hot water with the IRS.
Solution: Open a business bank account and use it religiously. The second you mix personal purchases with your business account, you start heading down a slippery slope.
Forget About Cash Flow
Your business can be raking in profits but run out of cash. Simple as that.
That’s what happens when you don’t closely monitor when expenses are due vs when you’ll have the cash on hand to pay them.
Cash flow problems are often the downfall of otherwise successful businesses. By managing your cash flow, you’ll always know when bills are due, when you’ll have the funds to pay them and exactly how long you can last should something come up.
Pay Attention to Tax Deadlines
This one was already covered above but it’s worth repeating.
The IRS isn’t messing around these days. If you fail to pay and file on time you will be penalized. And those penalties add up quickly.
Start late filing and late payment penalties can be as high as 45% of your unpaid taxes. Paid directly out of your business.
Don’t Leave Enough Money for Taxes
This mistake often goes hand in hand with the last one.
Too many small businesses see their income as profit. When they receive payment for their goods or services, they spend it instead of setting money aside for taxes.
And just like that, tax season rolls around and you have no money set aside to pay Uncle Sam. What usually happens next? Your business incurs underpayment penalties and even worse…interest on your tax bill.
The rule of thumb here is setting aside 25-30% of each payment received for taxes.
Pro-tip: Have it automatically deposited into your tax savings account. That way there’s no temptation to spend it!
Don’t Keep Accurate Records
If you’re making any of the first four mistakes on this list…you’re probably terrible at recordkeeping too.
There’s nothing worse than digging through stacks of papers looking for that one receipt to prove you made a deductible expense to the IRS.
Everything – and that means everything – should be logged. Whether you use bookkeeping software or old fashion notebooks, making sure you track all of your financial transactions is imperative.
This also ties back to cash flow management. If you don’t know where every dollar is going, how will you ever know when you might run low?
Streamlined Filing Compliance Procedures Save Businesses
Here’s the thing about smart small business owners…
They prioritize streamlining filing compliance procedures before they’re forced to deal with the IRS. By having simple processes in place that you review and follow monthly, you drastically decrease your chances of running into tax-related penalties.
Some examples include:
Calendar reminders for every tax filing deadline.
Enforcing the use of bookkeeping software that automatically categorizes expenses.
Partnering with a trusted tax professional to go over your books annually.
Making digital copies of all receipts/invoices/etc.
Streamlined filing compliance procedures do more than save you from headaches with the IRS. By having a better understanding of where your business stands financially month over month, you’re able to make smarter decisions going forward.
A QuickBooks study showed that 42% of small business owners fell into the “financially literate” category before starting their businesses. When it comes to managing your money, that lack of knowledge can come back to haunt you.
That’s why it’s crucial to set yourself up for success by having reliable bookkeeping software AND a qualified tax professional on your side.
Easy Ways To Keep Your Money Where It Belongs: In Your Business
The best way to avoid any money mistakes as a small business owner is to prevent them from happening in the first place. Below are some easy tips to ensure you’re running your business finances the right way.
Separate your personal and business expenses. This can’t be stressed enough! Open a business bank account and use it.
Monitor your cash flow weekly. Stay on top of your cash flow so you’re never surprised.
Automate setting money aside for taxes. With every dollar that comes into your business, have a certain percentage deposited into your tax savings account.
Invest in bookkeeping software. And use it! Don’t just set up a profile and throw your expenses into “miscellaneous.” Make sure you understand every financial transaction your business makes.
Hire a tax pro you can trust. Every business is different and chances are there are unique tax circumstances that pertain to your small business. By working with a tax professional who knows the ins and outs of your industry, you can avoid unnecessary mistakes come tax time.
These tips may seem like a no-brainer. But you’d be surprised how many small business owners ignore the basics.
Bottom Line
Money mistakes can kill your business. Period.
Whether it be poor cash flow management or missing a single tax filing deadline, there are tons of pitfalls that await unsuspecting small business owners.
The good news is that by far, most of these mistakes are completely avoidable. And the solutions to prevent them are simple.
Just remember to take your business finances seriously. Set up streamlined filing compliance procedures and review them monthly to grow your business pain-free.
