#23: 6 FINANCIAL PITFALLS TO AVOID IN YOUR SMALL BUSINESS

This episode is meant to share, not scare. I cover 6 financial pitfalls that many small business owners commonly fall into and how to avoid them. These pitfalls can derail your business so being aware of them and keeping them top of mind is incredibly important! Avoiding these financial missteps will help set you a path toward better financial management, peace of mind, and ultimately, business success and growth. 

Resources Mentioned:

• Episode 15: How to Stay on Track with Estimated Tax
• Estimated Tax Guide for Entrepreneurs: My free guide that breaks down what estimated taxes are and how to save for them
• Estimated Tax Tracker: This done-for-you tax tracking template is available for purchase and can be used for years to come in your business. It will help keep you organized and stress-free when it comes to tracking and saving for your estimated taxes.
• Episode 22: 3 Benefits of Accurate Bookkeeping

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My favorite budgeting app w/ an amazing free version:
EVERY DOLLAR BUDGETING APP

My preferred business credit card with cash rewards (affiliate link):

If you have healthy behaviors around spending with a credit card, this is a great one to use and earn cash back. It also links up well with QuickBooks Online. If you have unhealthy spending habits with credit cards, please avoid using one! You need to be able to pay it off monthly and not carry a balance. I use this one for my business and it makes paying bills simple.

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Disclaimer: This content is for educational and informational purposes only. Please consult with an accounting professional for direct advice based on your specific business situation.

Transcript

Hello my entrepreneurial friend! Welcome back to the Financially Adjusted podcast. I'm Leslie, your hostess and I'm here to bring you knowledge, actionable steps, and encouragement when it comes to managing the money in your small business. We haven't officially met but I feel as if I know you are ready because I've met and worked with so many business owners like you.

If I had to guess, I'd say that you're here because you care deeply about your business and your livelihood. And even though you're passionate about your business and you've poured your heart and soul into it, you can't seem to get to a place, or you feel like you're in control of your money. Or you think you are, and financial issues pop up that smack you in the face.

Most business owners fall into the trap of busyness taking over and even though you have intentions of focusing on your money, and carving out time, you look up and another year's over and you're still in the dark about the actual financial health of your business. If this sounds like you, you're not alone.

When you are in this cycle of not having enough time and not having systems in place to help you easily check-in with your money and manage it properly, there are common pitfalls that you might fall into financially and my goal today is to bring awareness to those.

There are six financial pitfalls that I'm going to touch on today and the intention is not to scare you or shame you with these. It's to make you aware of them so you have a higher chance of avoiding them.

The first one I'm going to talk about is not separating personal and business finances. This is a pretty common one that I see, and with this pitfall, I am not referring to the few times a year that you might slip up and accidentally purchase a business expense with a personal card or vice versa, I'm talking to the business owners who perpetually use their business bank accounts and credit cards as if they were personal ones and there's really no separation of business and personal. If you've been listening to this podcast, you've likely heard me talk about this. And why you need to keep business and personal separate.

The biggest reason is legal protection because using your business for personal expenses pierces the corporate veil if you're an LLC or corporation, and this makes your legal protections less effective or not effective at all meaning that if someone sued you, your personal assets could be at risk rather than just your business assets.

The main reason for setting up an LLC is legal protection. You want to make sure you guard that benefit and keep those expenses separate. The other big cons to intertwining business and personal transactions is the messiness it creates and just the lack of professionalism. You can also tune into other podcasts and hear me talk about this one. It's much harder to accurately keep your books and track your money. Also, an outsourced bookkeeper is likely going to charge you more if you do this because of the extra work and complexity that happens. In addition to this, if you ever want to get a loan or sell your business, this will look messy and unprofessional, and it could result in you losing out on an opportunity.

The second pitfall we're going to cover is not having a budget or a money allocation plan. I'm an unapologetic nag about having a business budget or money allocation plan, as I like to call it. If you hate the word budget, you can use that too.

There are many episodes where I talk about the pros and cons of having a money allocation plan so it's definitely worth going back and tuning in to those episodes. This pitfall is also a very common one that I see and it's my goal to make it top of mind for as many entrepreneurs as I possibly can. Having a money allocation plan is vital to the success and growth of your business. Cash flow is the lifeblood of every small business. The timing of your expenses and income affect your business greatly and when you have this road map of this business map or money plan it allows you to stay on top of managing your money and the timing of what's flowing in and out.

I like to compare financial health to the health of the body and the mind. When you aren't being proactive about your physical and mental health, you end up always being in a mode where all you're doing is managing the negative consequences of not taking care of yourself and the health issues that result. To maintain physical and mental health it requires a proactive approach of consistently eating well, moving your body, going to the chiropractor, having massage, and having the right input mentally to maintain your mental health.

When you're not proactive, you're not in control of your health. Usually that looks like weight gain, disease, depression and anxiety, and living with constant pain and inflammation.

And the same approach can be applied to your finances. When you're proactive with your finances, that means creating and sticking to a money plan, staying up to date with your bookkeeping, and checking in frequently and consistently throughout the month. When you're not intentional about these things, managing your money ends up looking like just spending your time reacting to the negative consequences. You end up putting out fires constantly and looking in the rearview mirror to see what happened and how to fix it.

Sometimes that can look like scrambling to pay a bill you forgot about that's due annually or quarterly like insurance or scrambling to come up with the money to pay your tax bill. If you stay in this type of reactive cycle, you're not in control and you're not actually managing your money. This can be absolutely exhausting and make you feel like you're never getting ahead. Having a money plan can solve this problem.

No matter what your reasons or excuses are for not having a budget and no matter how hard it might be to start, it’s also really hard to deal with the consequences of not having a plan. Choose your hard friend. Once you dive in and get the hang of it, it will get easier and easier and the positive results you'll get will be amazing to you.

Okay. Third pitfall that I want to talk about is neglecting to track expenses properly. You might be surprised by how many business owners just fly by the seat of their pants when it comes to this. Either they aren't tracking expenses at all or they're doing it all over the place. This can lead to major issues like overspending or missing out on valuable tax deductions, If this is you and you're not staying on top of expenses, it's almost impossible to know the financial health of your business because you don't know where your hard earned revenue is going. Many business owners fall into the trap of paying for subscriptions they're no longer using. And you can miss seeing fraudulent transactions if you're not tracking your expenses.

There's just a lot of things that can be missed when you don't have your finger on the pulse when it comes to your expenses. This pitfall can be easily remedied by having a cloud-based accounting system like QuickBooks online that helps you stay up on your bookkeeping and track expenses in an organized way. You can run expense reports through QuickBooks or a similar software, and specifically look at all of your expenses to examine what you have going on, and you can also run a profit and loss statement monthly which you should be doing. That is going to tell you how much your expenses are in comparison to your revenue or what percentage your expenses are so that you can get a handle on how heavy you’re spending in certain categories and then overall in your business. I mean this directly impacts the money that's left over from your revenue so it's a big deal.

And something else I highly recommend is to keep a spreadsheet or notebook, if you're old school you like the notebook you like to write things down, but I think a spreadsheet works well because it's easier track and it's going to list out recurring expenses and any one-off expected expenses in the coming months. Keep this spreadsheet up to date and use it to create your accurate budget each month like I talked about in the last pitfall. It'll make it really easy, and you'll have an up to date list of your expenses.

Okay number four. This pitfall is not saving for estimated taxes, and this is huge. This common pitfall is one that I see often and one that can have pretty dire consequences and negatively impact the entire upcoming year for you. When you aren't properly saving for taxes in your business from month to month, the result of this can end up being huge tax bill the following year at tax time. If you don't have the money saved for taxes, you still owe them. You still have pay them and that means taking cash from your current revenue that's flowing in.

This cycle will lead you to always being behind with your cash flow and staying stuck in that reactive mode that I talked about. I did an entire episode on this so please check that out. It's episode fifteen, ‘How to Stay on Track with Estimated Tax’. Most times it's not enough to just pay in each quarter what your tax pro advised you to. You'll stay compliant, which is great, but if you're a business that's growing there are very likely going to be additional taxes that you owe because those estimated taxes might not be based on the higher net profit that you currently have.

I'll link episode fifteen in the show notes as well as a free resource that I created. It's a guide to estimated taxes - what they are, how to save for them, all of that. I also have an estimated tax tracker that you can grab which is a done for you spreadsheet with a tutorial on how to use that and that is for purchase on my website. It can be used for years to come to track and save for taxes based on your real-time profit in your business so that you can always be prepared and not be looking in the rearview mirror. This is the biggest and most common pitfall for small business entrepreneurs, unfortunately. And you'll avoid a lot of difficulty if you can plan and stay organized around your estimated taxes.

Okay. We are moving right through this these six pitfalls. The next one is the fifth one and it's debt. So as far as financial pitfalls go this one should probably at the top of the list but it's number five. I am a huge advocate for running your business debt free but I do recognize that sometimes debt can help to propel you forward and grow your revenue faster. Debt is something to approach with great caution though and I recommend really examining first the relationship that you have with money and debt and how you've used it in the past and what it felt like and the situations it got you in. Really examine that. And I recommend that if you are going to take on debt for your business, try to stay within certain parameters. Try to stay within a range of fifteen percent of your annual projected revenue for total debt. Definitely try to stay way under that if you can, but I think that that is a good parameter to stick to. And a boundary to create for yourself.

So, if your annual revenue is a two hundred thousand dollars, you're not going to take on debt more than thirty thousand dollars. Also try to keep your payments, your monthly payments, at five percent or less of your monthly revenue. And have that payoff time frame be about three to four years or less. I recommend that if you have business debt you try paying it off as quickly as possible. See how much extra you can pay on it each month until it's gone. And if the interest rate is over nine or ten percent, don't do it. Walk away.

Interest payments will eat away at your profit significantly if you're not careful. It's okay to use credit cards also, if you have healthy spending habits and you are able to pay it in full every month. However, most credit cards have insanely high interest rates so if you fall into the trap of carrying a balance on these cards, it could have really negative consequences. I don't want that for you. Please avoid this. If this is you then I would say prioritize paying off that credit card debt over everything else because if you do pull a profit and loss statement and you have a high credit card debt, take a look at the percentage of what that total payment is each month and that'll clue you into just how much it's eating away at your revenue. So, avoid this at all costs.

Alright, the final and sixth pitfall that I want to talk about is no bookkeeping system, inaccurate bookkeeping, or not staying on top of your bookkeeping or not being up to date with it.

So, listen, I am a bookkeeping gal. I run a bookkeeping business, and I have seen firsthand how having an accurate, up to date bookkeeping system can level up your business. It is absolutely vital that every business has an up to date and accurate bookkeeping system. My last episode number episode number twenty-two is all about the benefits of bookkeeping so definitely go back and give that a listen if you haven't yet. I won't reiterate all the benefits here, but I can tell you that if you don't have your bookkeeping in order, my friend, you do not know if your business is healthy. You must know what your net profit is each month in order to have your finger on the pulse of your business health and to make informed decisions as a business owner.

I get that many business owners have to DIY their bookkeeping for a period of time, you know, maybe if you're at the beginning stages of business, you have to do this but if you aren't able to keep up monthly with it and you're not sure if you're doing it right, get an outsourced bookkeeper.

If you're someone who actually enjoys doing it by yourself you know doing the bookkeeping by yourself, that’s great, but I will say just having your tax professional look over it briefly once a year at tax time is not good enough. You need to plug into some type of education around bookkeeping, or check-in more frequently with your tax professional throughout the year just to make sure you're doing this accurately and correctly for month-to-month so that you're working with accurate numbers all year long. At tax time is too late. You've already possibly missed deductions. You've already missed out on having all that insight for your business that those numbers provide you.

So, you're basically in the dark the entire year and then in getting this real quick glimpse of clarity one time a year when it's too late. So that's definitely not a flow that you want to be in. That's reactive mode. Get into proactive mode and get your bookkeeping in order so you have those accurate numbers month to month.

I've got something in the works for next year so just stay tuned for that because I know a lot of business owners that do have to DIY their bookkeeping. I recognize that not everybody can afford to outsource that.

I'm working on a course that will cover all the bookkeeping basics and it'll help somebody that's a DIY bookkeeper or someone who's outsourcing but just wants to understand their finances on a deeper level. So definitely stay tuned for that next year.

I talk about this a lot but it's worth repeating. Make sure you're working with an outsourced bookkeeper who provides monthly reports and helps you understand those monthly reports. The negative effects of not keeping up with your books can look like missing out on huge tax deductions, not having financial reports when you need them for a loan or another opportunity, and putting you into a perpetually reactive mode where in the dark

So, bottom line, don't be that person that doesn't know your financial health and doesn't have your bookkeeping in order. The best time to get your bookkeeping together was yesterday but the next best time is today friend. So, take that next step forward whether it's carving out the time in your schedule to get it done yourself, reaching out to your bookkeeper to prompt them to do it and meet with you, or calling around to find a good outsourced bookkeeper that can keep you up to date.

Again, this episode is not to scare or shame you but it's meant to bring light to how being proactive and avoiding these pitfalls can set you on a path to financial freedom, a healthy thriving business, and better yet peace of mind.

As always remember, action brings clarity, and imperfect action is better than no action at all. I'm rooting for you and I'm here to guide you so if you have any questions that you'd love to have answered on the podcast shoot me a message via text. You can find that hyperlink at the top of the show notes, or you can reach out to me via DM on social or email me at support@financiallyadjusted.com.