5 Financial Habits That Can Mar Your Business

Many entrepreneurs struggle with poor financial habits that can undermine their efforts to grow and expand their businesses. These habits can lead to financial difficulties, missed opportunities, and even failure.

As we forge ahead, we will explore five financial habits that can mar your business and provide tips on how to avoid them. By taking steps to implement good financial practices, entrepreneurs can ensure the long-term financial success of their businesses.

Absence of a budgeting system

A survey revealed that 50% of small businesses failed to create an official, formally documented budget. This suggests that some business owners see budgets as an unnecessary structure. Entrepreneurs who fail to manage their businesses with a budgeting system put themselves at risk of overspending and underestimating expenses. When this happens, they set themselves up for financial difficulties. A budget can help you avoid last-minute emergency spending and use scarce resources well. 

It can also help you discover business planning gaps and identify why cash leaks happen. Creating a budget and tracking expenses are crucial for managing cash flow and making informed financial decisions. This is because they keep you connected to your company objectives, track how you manage debt, manage cash flow, and assess how you manage resources.

To get started, make a budget on the first day of the month. This will help you estimate how much income you will receive that month and how many expenses you will have. At the end of the month, review the budget to see how the month went. Make necessary corrections and repeat it again next month.

Mixing personal and business finances

Another financial habit that can mar your business is mixing personal and business finances. This habit can lead to confusion and make it difficult to track expenses, taxes, and profits. An expert from Forbes Finance Council once noted that mixing personal finances pierces the corporate veil and can lead to problems in an audit.

Also, co-mingling finances makes it difficult for you to get a full picture of the business’s financial health. This habit can slow you down when you are trying to access funding, which can consequently kill your business. Having said this, mixing business and personal finances is a habit that should be avoided for business success. Importantly, separate personal and business finances and use separate bank accounts for each. This will make it easy for you to track expenses, keep your budgeting system effective and protect your financial future.

Ignoring income statements and balance sheets

Financial statements like income statements and balance sheets can be a little bit scary but ignoring them is a bad financial habit. This is because financial statements are indispensable when it comes to the financial planning of your business. Ignoring them can lead to missed opportunities, inaccurate financial decisions, and missed tax deductions. 

To avoid this, regularly review your financial statements. This will give you insights into the financial health of the business and help identify areas for improvement. It can also improve the quality of decisions you make for your business, reduce risk and improve your daily business operations.

No business emergency fund

Not having a business emergency fund is a habit that can leave your business vulnerable to unexpected expenses or loss of revenue. A business emergency fund can be used to cover payroll when cash flow is struggling, overhead costs when sales slow down and sort out repair or replacement expenses.

Business emergencies do not happen to you alone, but having an emergency fund keeps you in an advantaged position. It will also prevent you from using your personal assets during business emergencies. You can start out by having three to six months of operating expenses saved in your business emergency fund.

Taking too many loans

According to reports, 17 per cent of small and midsize businesses have an outstanding debt that ranges between $100,000 and $250,000. While businesses can use debt to manage cash flow, supplier payments and payroll, taking out too many loans or using too much credit, can lead to financial difficulties. It can also negatively impact the credit score of the business. 

As you take on debt, ensure that the debt is working for you, not against you. Also, only take on debt that can be paid back on time.