7 Bad Financial Habits That Could Hurt Your Business
Running a business means wearing many hats, including human resources, marketing, accounting, and bookkeeping. Unfortunately, many business owners don't recognize that they don't have the experience to take care of all of their business' finances on their own. Many small business owners spend money without giving it a second thought. While they might check their bank accounts, they might not understand the impact their purchasing behavior could have on the entire company.
Bad Financial Habits That Could Hurt Your Business
It's easy to start using bad habits to spend your business' money. However, bad habits can lead to bankruptcy. If you want to ensure the success of your business, there are a few financial habits you should avoid. These are the bad financial habits that could hurt your business.
1. Overpaying for Office Space
Every business owner wants a beautiful office space they can be proud of, but if you're spending too much on office space, you won't have resources left over for large projects or to fix equipment when it goes down. If you're just getting started, there's no reason to pay for office space with a park or other expensive amenities, especially if you know they'll go unused by your employees. You should never invest in too many rooms until you need them. While you want your business to be poised for growth, you can always upgrade offices as you grow instead of paying too much for space you don't need.
Additionally, if your business does grow and you get locked into a three-year or more office lease, you can allow your employees to work remotely to save on space until your lease is up and you can afford a larger office. Remember, when you rent or buy an office, you'll have additional expenses as well, such as electricity, gas, furniture, and property insurance that will all be more expensive the more space you have.
2. Taking Out Loans
Most small businesses need some sort of funding to get off the ground, but you mustn't take on too many loans too quickly. Having too many loans you need to pay back monthly can make it difficult to pay for the items you need while making running your business more expensive in the long run. In addition, with high-interest rates to combat inflation, loans can be expensive monthly payments that you can avoid through smart bookkeeping and healthy spending habits.
Additionally, it's important to remember that most businesses don't have a profit for at least a few years, so taking on additional debt might force you out of business before you start making money.
3. Overspending on Non-Essential Items
Depending on what your company does, non-essential items can vary. However, many businesses might not need some of the items that they're putting so much money into, especially if they're just starting out. For example, a business might not need to offer lunch to its employees every day. While feeding your employees is a nice perk, it's not something you can offer every day when you don't have enough cash flow. Your goal should be to be able to pay your employees first.
Additionally, some aspects of your marketing campaign might be considered non-essential. For example, depending on your business, you might not need to spend tens of thousands of dollars on a billboard campaign just to get your name out there. However, you can start spending more money on marketing once your business turns a profit and you have more to spend.
Bad Accounting Habits
Not every business needs an accounting department filled with professionals for forty hours a week. However, many small business owners make the mistake of not getting an accountant or trying to do their accounting themselves. While you don't always need an accounting department, you should have a professional accountant by your side, especially during tax season. Accountants can help you file your taxes and track expenses and profits using professional tax software to get a better understanding of your business's financial health.
Of course, accounting is important before and after-tax season as well. You should always understand how much your company spends daily and what your profit margins are. Accounting and finance departments will also handle other aspects of the business, such as payroll, to ensure your employees are getting paid and you're following all local and federal laws regarding employee payments.
Not Protecting the Business
Your business is required to have insurance by law. However, the type of insurance you need will depend on your type of business. For example, the federal government requires companies with employees to have worker's compensation and unemployment insurance. You may also choose to take out other types of insurance, such as liability insurance, which might not be required by law, depending on the state in which you operate. Insurance can prevent you from major lawsuits and financial problems so you can focus on ensuring the success of the business instead of worrying about the future.
Not Separating Personal and Business Accounts
You wouldn't invest your business profits in cryptocurrency, so why would you use your personal checking account for business expenses? As a business owner, it's good practice to keep separate personal and business bank accounts to ensure you're not dipping into your personal finances to pay for business expenses. Likewise, you should never use your business accounts to pay for personal expenses, such as rent, groceries, or impulse shopping. Keeping your two accounts separate can also make it easier to track your expenses, saving you time on bookkeeping and during tax season.
If you choose to use accounting software, you can easily track your income and expenses in one place using your business bank account and not have to worry about which expenses on your personal account were for the business and vice versa. Ultimately having separate accounts will make it easier to understand your business' finances to help you prevent overspending.
Not Having Emergency Funds
All businesses need emergency funds to pay for surprise expenses. Surprise expenses typically come out of nowhere and can impact every aspect of the business. For example, your office toilets might overflow, causing you to repipe the entire office, or your business can be sued, and you need the emergency funds to pay for lawyers. In addition, emergency funds can help prevent you from taking out more loans to pay for expenses while preparing you to deal with anything.
Bad Financial Habits
Ultimately, you need cash flow to keep your business running smoothly. Engaging in bad financial habits can force you to lay off employees, cut corners, and seek new loans just to keep yourself in business. By practicing good financial habits, you can understand how much money your business is making and spending to ensure you won't need to put yourself into debt for its success.