How to recognize what’s hurting your profits, and what to do about it.
Running a small business is a challenge, but it can be made easier by knowing the common finance errors small business owners make, plus the solutions proven to unleash growth—and reduce your stress.
As a small business owner, you’re no stranger to the ups and downs of running your own business: hiring and losing staff, price changes, inflation, and sudden emergencies are part of your daily routine.
And while much of this is beyond your control, there is plenty within your control as a small business owner, particularly your finances.
In this in-depth guide, you’ll discover 10 mistakes small business owners often make in their finances, errors that cost them not only money but growth, anxiety, agility, and stability.
Plus, you’ll find dozens, if not hundreds, of actionable tips to help you proactively tackle these issues before they do real harm.
There’s a simple answer here: no money means no business.
But the more complicated answer is that even successful, profitable businesses can fail if they take their eye off the finance ball for even just a month or two. Yesterday’s success is never a guarantee for tomorrow’s success and change happens quickly.
Finance affects every aspect of a business, from inventory to hiring to marketing to R&D and beyond. When cash flow is corrupted, savings run out, or there’s considerable financial risk, there’s a ripple effect through the business.
Your best staff sense instability and leave. You spend more time renegotiating with vendors than you do serving customers. Your customer base shrinks as your ad budget is directed to overdraft fees or debt reduction. And your customers? They start to notice the cost-cutting, drops in quality, and misalignment with your competitors.
What was a temporary rough patch can quickly spiral.
Importantly, finances are a major point of stress for business owners; 45% of founders report anxiety and 30% have trouble sleeping. So, getting this area of the business sorted out means happier, healthier entrepreneurs who can focus their time, attention, and skill on their business—and even life beyond their venture.
Luckily, you’re reading this piece, so you’ll be able to spot—and stop—problems before they get out of control, saving yourself from the challenges and stressors most SMEs struggle to solve.
With more knowledge and access to expertise, you can take your business to new heights, unlocking levels of growth, stability, and peace you never thought possible.
Without further delay, here are the top 10 financial mistakes small business owners make:
While this may seem like an obvious mistake, this error presents itself in a multitude of ways, many of which go unnoticed until they’re too late.
First, there’s cost control negligence. Business owners forget—or simply don’t—monitor their costs, ignoring the availability of bookkeepers, finance tracking software, and well-established best practices. Soon, they’re paying more for electricity, their POS price jumped, and the raises they promised are all taking a big bite out of their bottom line.
By failing to notice changes in costs, they shrink their margins and set in motion plans or agreements that will be hard to keep if—or probably when—the financial outlook shifts. When they need to make a critical decision, they won’t have a strong enough understanding of their numbers to make the right move.
Second, many small business owners fall into the “life is good” trap: when profits are up, they think this trend will last forever. They become looser with their spending. There’s money to waste or experiment with. They don’t negotiate prices or raises as aggressively.
However, the good times may be a seasonal trend, a quirk in a marketing algorithm, or the peak before a sharp drop-off. As soon as revenue drops, they soon realize how far out of control costs have become and need a rapid solution to offset their low margins and overcommitment to customers, vendors, and team members.
Third, many small business owners do not budget properly, a practice that should potentially occur on a weekly, monthly, quarterly, and yearly basis. Not only does it give you confidence and clarity of your expenses and allow you to plan for short- and long-term expenditures, you’re less tempted to splurge on unplanned purchases. A budget has the added benefits of giving you data to spot trends, like cost, margin, and profit changes over time. It’s easy to look back at last January’s budget and notice how much more expensive a product is, indicating a need to implement cost control measures or explore alternatives.
Of course, the challenge as a business owner is that you have many things to do and you can’t spend all day on cost analysis or budgeting; this is where having a finance professional at your disposal is vital. They keep an eye on the costs while you focus your skill and time elsewhere, or keep your head out of the clouds when times are good. Their objective, professional guidance is key—and that’s not to mention their ability to analyze and report on costs or other vital functions, like cash flow.
Your business may be wildly profitable with strong financial statements—but do you ever feel anxious, wondering if your deposit will reach your account in time to cover payroll and rent?
That’s a classic sign of suboptimal cash flow, a challenge virtually every business owner faces at one point or another.
It’s not just stressful for you. It puts strain on your business in a multitude of ways, including distracting you from growth opportunities, frustrating unpaid employees, paying fees for late bills or overdrafts, and overusing high-interest credit cards. It creates confusion within an otherwise profitable organization.
Cash flow troubles come from a variety of sources, from not having enough cash reserves to poor inventory management to challenges collecting payments from customers or clients, or not leveraging debt properly.
But don’t be too hard on yourself; managing money coming in and going out isn’t easy.
First, get a proper understanding of what is causing your cash flow issues. Are customers paying late? Is your inventory management out of control? Or, are you a bit too loose with your business Amex?
It may be that you have many cash flow issues that are compounding upon each other, which you can learn more about by bringing in your staff and leadership for insights and feedback. After all, they may notice things within their area of focus that are beyond your awareness.
Second, find a workable solution by brainstorming ideas. To get cash in faster, incentivize early or upfront payment. To control inventory, implement a digital inventory management system. And get credit card debt cleaned up by having someone oversee your spending. You may encourage employees to bring future cash flow issues to your attention with an anonymous reporting system—or a rewards program—creating a culture where everyone feels they contribute to the future of the company.
Finally, it’s important to realize that many cash flow challenges are beyond repair or management without a professional involved. Especially as businesses get more complex or scale, even finance-savvy founders can quickly find themselves out of depth (and out of time!) when analyzing and managing cash flow.
While it can be helpful and healthy to focus on your own business and avoid distractions, this becomes an issue when you lose sight of what your competitors, and the market, are doing.
By ignoring external factors that directly impact you and your customers, you run the risk of becoming outdated and uncompetitive, which will have a direct negative impact upon your company’s financial health. In the corporate world, there are plenty of examples of these failures, from Kodak ignoring digital photography to Blockbuster missing the boat on streaming. The moral of the story is: big businesses are not immune from the consequences of ignoring the market or competitors—and neither are small businesses.
For example, what if a competing car wash starts offering a wildly popular unlimited monthly wash pass—and you haven’t even explored the operational or technical ability to match it? What if a competing SaaS business introduces a new feature you only learn of during a customer demo? Both instances put your business at a disadvantage where you go from a competitor to a lagging company who has to respond to others’ innovations instead of creating their own.
To avoid being caught unaware (and uncompetitive!), institute regular competitor monitoring initiatives, selecting a few of your key competitors for ongoing monitoring, setting up Google keyword alerts, subscribing to their marketing materials, and even secretly buying their products or services. Talk to your trusted customers and monitor social media conversations, especially groups and pages where you know your customer type is discussing services or products like yours.
Monitoring the market is especially vital if you’re a local business dependent upon a local customer base and regional economy.
And this is not limited to merely watching your competitors. An ice cream shop, small hardware store, or bike shop is especially affected by local changes, like an employer moving out of the area or new tax rules hitting the books.
and this is not limited to merely watching your competitors. An ice cream shop, small hardware store, or bike shop is especially affected by local changes, like an employer moving out of the area or new tax rules hitting the books.
By monitoring state and local laws, regional sentiments, or changes to the economic conditions, you give your business the advanced notice it needs to plan and pivot. For example, you may not want to buy that downtown storefront once you find out taxes go up significantly next year. Or, you may want to sign that lease immediately because main street will turn into a pedestrian zone, ideal for your cupcake shop. You’ll only know by monitoring your area.
The truth is, however, monitoring competitors and the market alone isn’t always enough. It takes deeper analysis, number crunching, and strategy to turn insights into action or decisions, like knowing how to optimize for a change in tax laws. Having a go-to pro to help you analyze and navigate these decisions is a brilliant way to get an external, objective consultant to help you through the rapid changes.
If you’d like to see how your finances stack up, get a free and instant Financial Statements Scorecard now to discover the health of your company accounts.
As they say, there are only two things certain in life: death and taxes.
Unfortunately, many business owners take this statement to mean that taxes are simply something to be paid. They cut a check quarterly or annually and hope that, somehow, their taxes won’t be as high next year, treating it like any other bill they have to pay to run their business. However, this method leaves money on the table while ensuring they miss out on a variety of advantages.
While the IRS always has to take their cut, savvy business owners know they can plan and strategize their taxes—which impacts a business far beyond taxes alone.
Having a tax plan or strategy allows you to optimize your tax burden, applying for rebates and incentives or timing expenses/income. A professional can help you apply for and secure rebates and tax breaks, determine your eligibility, and understand how/when to apply a tax credit, depending upon your unique business traits or situation. They can also help you time expenses, potentially reducing taxable income, or timing income so it affects future tax years, totally legal methods of minimizing a tax burden.
Ultimately, a tax professional will know about tax breaks and their best practices far better than even a tax-savvy founder, especially one who is distracted by other parts of the business.
Having a tax strategy allows you to ensure your tax payments are manageable and timely (refer back to cash flow!), reducing the need to defer payments or pay tax bills with a high-interest credit card. By ensuring there’s enough cash on hand to cover opex plus taxes, you’ll experience far less stress.
Strategy goes beyond taxes, too. For example, a tax professional may suggest covering student loans for employees, offering insurance, or providing tuition reimbursement, massively helpful tools for attracting and retaining staff—that also may yield potential tax savings. Or, they might suggest you hire your spouse or children, who may be able to work tax-free, thanks to the Tax Cuts and Jobs Act of 2018. The good part about the complexity of American taxes is you never know when there’s a sweet tax advantage within reach.
Finally, having a plan for your tax burden means you reduce compliance errors, risk, or audits. Ensuring everything is paid on time and in full means never dreading a call from the IRS—or having to undergo an audit.
While this mistake may sound contrary to the earlier tip about controlling costs, it is in fact complementary advice. Cost control isn’t just about cost reduction; it’s also about knowing when, where, and how to spend money wisely.
For too many business owners, they only focus on growing their profit margin or eliminating what they perceive to be “expensive”. In fact, they should be focused on the return on investment (ROI) of their spending, deciding how much return is necessary to justify a cost and how much tolerance there can be for low, or no, ROI.
For example, a founder may consider canceling a $5,000 monthly retainer agreement with a content marketing agency due to its high perceived cost. That’s sixty grand per year, they worriedly think.
However, if that agency is driving $700K worth of sales per year, even a $10,000 or $15,000 monthly retainer is likely worthwhile. Don’t get hung up on a large number if the ROI is solid, though do keep an eye on any changes in ROI over time.
Alternatively, there may be business costs where you’re willing to break even—or even lose money. For example, if you’re a luxury boutique hotel, you might cut housekeeping costs by hiring fewer people and purchasing cheaper cleaning products. Yet it won’t take long for unhappy guests to leave negative reviews about the filthy carpet or wrinkled sheets, forming the question: were the cost savings really worth it?
In other cases, it may be difficult to assess whether or not there’s positive ROI. For example, is it worth upgrading your cafe’s paper cups? Or, would a downgrade frustrate customers—or go unnoticed? Would offering more benefits reduce employee churn and hiring expenses, or would it have little effect? This is where it’s important to talk to customers and employees, conducting formal or informal research, depending on your time, budget, and the importance of the decision.
To calculate ROI, the formula is rather simple: Net Profit / Investment Cost x 100 = ROI
Where it gets more complicated—and where it pays to bring in a professional—is when you have many efforts or initiatives to analyze. A professional helps, too, when you’re unsure of what the impact, investment, or profit is from an activity or product, like in our example about paper cups. Finally, an expert can also help you answer the question: how much ROI is enough?
While you may never be able to pin down ROI to the decimal point, having a focus on ROI will give you an informed way to make decisions about business investments, cost control, and more so you focus less on what you perceive to be “expensive” and more on what’s helpful to your business.
Unsustainable debt is never a good thing, but most business owners already know this—and there’s more on that later.
But what some business owners don’t realize is that debt can be an advantage; notice the mistake is not about having debt, but about not handling it the right way.
In fact, when strategic and sustainable, debt can be a critical advantage for businesses, freeing up money for investment, hedging against inflation, and giving access to “inexpensive” capital, instead of high-interest credit cards. Standard business loans over a host of benefits.
Debt can help you weather a downturn or cash flow problem, allow you to say “yes” to an expansion, and prevent you from having to sell off assets or chunks of the business to raise money. Being open to debt can help you tap into business-friendly loans, like SBA loans, that you’d otherwise miss out on, relying purely on revenue to fund growth and improvements. In fact, the top 3 reasons Forbes survey respondents gave for accessing credit were: business expansion, equipment purchases, and marketing/advertising—all key to growing a business.
For example, imagine your business has the chance to build a partnership that requires a $30K cash investment to buy capital. For the debt averse, the timing of their cash flow and the partnership may not line up, costing them a golden opportunity. However, for someone aware of the advantages of strategic debt, this becomes a worthwhile expense—even when paying interest on the investment.
On the flip side, debt can be a major problem for small businesses. High interest debt, cash flow issues, overreliance on credit cards, or simply wondering how you’ll ever pay it all off can be indications that debt has become problematic for your business—but it often takes deeper analysis to determine the severity and solutions.
Just like poor cost control can lead to reactionary decisions and inadequate cash flow can create operational issues, spiraling debt can create a ripple effect throughout a business. At some point, if the situation deteriorates enough, founders will spend more time dodging creditors and fighting repossession of company assets than running the business. When this happens it’s tough to resume as a functional, profitable business.
If you feel as if you’re underutilizing debt or overusing it, speaking with a finance professional can give you the clarity and confidence you need. From understanding how to better leverage debt and finding affordable interest rates, to renegotiating terms and making debt manageable, a financial professional is a critical asset to making debt helpful, not hurtful.
Don’t misread or misinterpret this one, please: we’re all about growth!
But growing a business is a lot like gardening. Stick with us here…
A gardener can water and fertilize a garden to the point it grows so wildly they’re tripping over zucchinis and handing tomatoes to anyone who passes by. But, at some point, if they haven’t set up the infrastructure, systems, and processes to scale this garden, it’ll either plateau or collapse.
Instead of going for wild growth, our green-thumbed gardener should have made proactive plans, implementing irrigation and water management to ensure the plants get enough moisture. Since they focused only on growth, they’re watering everything with a hose because they can’t install irrigation under growing plants—which doesn’t scale, and that’s the first of many problems their growth has caused. Soon, they won’t be able to keep up and will make sudden, reactionary decisions, like uprooting rutabagas for the encroaching squash.
Leaving the garden metaphor, a small business is much the same way. Growth is good, but scaling is better. Being scalable means your business can operate well, even under a growing workload or demands, leveraging economies of scale and sustainable processes/structure to support its growth.
Fortunately, businesses have never operated in a better time period for scaling. AI-driven tools streamline everything from customer support to design, machine learning crunches vast quantities of data, and yet one of the greatest advantages is simply having an experienced professional at your disposal, outsourcing your business finance tasks and responsibilities.
While you hand off time- and energy-intensive accounting, bookkeeping, and tax tasks to focus on the rest of your business, they use their strengths and skills to improve your business. This simple-yet-effective strategy helps you scale your impact, ensuring your business remains operational on the finance side while you find new ways to scale it in others, like marketing, sales, or operations.
Curious if your business is scaling—or only growing? Get an instant and free Business Valuation Report now to find out how much your company could be worth and how to increase it's value.
Business owners and entrepreneurs are successful in part because they embrace risk. But, like anything, too much of anything can be harmful—including risk.
Small businesses are especially prone to financial risk because, too often, they’re not fully professionalized. They still work off Excel spreadsheets or paperwork. There is too much access to cash, credit cards, or other financial information. An envelope holds petty cash with amounts scribbled on the back about who took how much and when.
But these issues can be solved simply by introducing better governance.
Having digital records of finances, limiting employee access to financial info and assets, or creating more transparent tracking will go a long way in reducing financial risk.
The big risk, in fact, comes from a company’s internal finance team, often full-time employees. Not only do full-time employees carry fixed, inflexible salary/benefit costs, they can also be the source of finance issues. An in-house bookkeeper may be within salary budget, but they may be costing you by leaving you open to compliance issues or unrealized financial opportunities. Their lack of expertise may leave you open to tax audits and other regulatory issues, especially as your business becomes more complex.
Or, like many SMBs, it might be the founder who is handling the finances. In this case, the issues are similar: they may not realize issues until they’re too late, they may not have the expertise or time to properly maximize costs or savings, and their ability to balance finances with all their other priorities is asking too much.
In this age, another risk of an internal team or DIY method is fraud. Not only is this an internal risk, fraud and cyberattacks are a growing risk for SMBs everywhere as criminals target organizations with more casual practices and less stout cybersecurity infrastructure. The median loss of fraud for an SMB? A whopping $117,000.
Having an outsourced finance team, across bookkeeping, accounting, tax, and audits, is a benefit—especially to reduce risk and chances of fraud. It gives you access to economies of scale, introducing a more experienced expert to your business at a much lower cost than a FT employee or handling it all yourself, especially when you realize you’re not covering the outsourced experts’ benefits, taxes, or other costs.
In the SMB finance realm, there’s plenty of risk but your finances don’t have to be the source of potential liability after all.
If you’re sensing a theme cross these mistakes, it’s summed up by Mistake #9: not having proper financial planning or projections.
Whether that means not planning out costs, your budget, your scaling strategy, or anything else, it’s being reactive in your business that will cause you major headaches.
Failing to have daily, weekly, monthly, quarterly, yearly, and even more distant financial plans will make it challenging to advance your business or succeed long-term. And, if you think you can’t plan that far in advance thanks to the ups and downs or volatility of your business, consider this: many Japanese firms have extremely long-term plans that span decades.
While you may not need to think about your revenue in 2080, you do need to plan for what the coming weeks, months, and years will bring. You need to determine what indicators mean trouble, what margins you need to achieve, and your risk factors that could derail your operations.
By building a financial plan, you’ll gain visibility over other aspects of your business, including:
While financial planning may be a heavy lift at first, the personal benefits for entrepreneurs and founders are worthwhile. By putting their business on a stable, consistent path, they gain the mental peace and a sense of stability they may not be accustomed to. With finances having a direct impact on the mental health of founders and entrepreneurs, this is one way to seriously upgrade your wellbeing and life.
If financial projections, planning, and margins sound like too much of a time investment, or simply beyond your strengths as a founder, you’re not alone. Financial planning is often conducted by a trusted, trained professional whose sole focus is on helping businesses make smart plans. As a bonus, they can help take the emotion out of the planning and build a data-driven, clear financial plan, helping you make updates to the plan as the business changes or evolves.
To see how healthy your finances are and begin creating a powerful financial plan, connect with our team to learn more about the benefits of working with a virtual part-time CFO.
Just like you don’t perform your own root canal, there are times when it really pays off to bring in a professional.
This is certainly true for your SMB finances, which can quickly become confusing, time-consuming, and even dangerous for a business when not properly managed.
Typically, there are 6 reasons people choose to bring in a finance expert to their small business:
By outsourcing finance tasks to a team at LedgerWay—from accounting to bookkeeping to taxes to audit support—you not only free up your schedule and focus, but tap into a network of trusted finance pros who have helped a business like yours.
Instead of relying on the narrow expertise and bandwidth of an internal team or trying to make a go of a DIY approach, you get cost-effective access to finance expertise that reduces risk and errors, boosts margins and profits, and helps your business scale well into the future with a long-term plan and strategy.
While some business owners assume they cannot afford outsourced finance help, LedgerWay is not only affordable for SMBs, our services become a net positive investment because we’re experts at revealing cost savings, accounting errors, recommending new revenue-producing initiatives, and optimizing your taxes.
No matter how you leverage our team of Certified CPAs, trusted by 1,600 small and medium business clients, we will become a game changing upgrade to your business, driving value from finance to operations and everything in between.
Curious how affordable and effective LedgerWay can be for your business?
Get in touch with a LedgerWay consultant now and get answers to your questions, plus gain helpful advice you can apply right away.
National Business Development & Sales Manager
Get your free Financial Statements Scorecard today to uncover the health of your company accounts, or connect with us to speak with our team.
