5 Money Management Mistakes Small Business Owners Make

What are the biggest money mistakes small business owners make and how can you avoid these potential pitfalls to keep your doors open for years to come? Here are the five most critical missteps to avoid:

That’s why today we’re looking at the top 5 money management mistakes small business owners make, along with some suggestions on how to solve them.

1. Spending Too Much Too Soon

 

 

“You need to spend money to make money.” It’s true investing in your business is necessary.

However, investing too much too soon is often cited as one of the top reasons for business failure.

 In those fragile first years, it’s more important to focus on acquiring new customers and proving your business model works than it is to over invest in your endeavor.

Much like over investing in a new hobby by buying gear just to lose interest in 3 months; many new business owners overspend, buying more equipment and tools than the business can sustain.

2. Overestimating Future Sales

 

 

It’s easy for a sense of optimism to replace practicality with positivity.
But conservative sale forecasting  is necessary to determining reasonable growth and profitability.

A formula you can follow is: X money spent on generating leads divided by sales made.
For example, if a company spends $500 on marketing in a year and acquired 100 customers, the cost per customer acquisition is $5.00.

It’s important to understand this metric, because if the formula holds true, you can better estimate your future sales by saying, “If I spend X more, I should get Y more customers.” This must be constantly monitored because the law of diminishing returns is inevitable.

3. Failing to Manage Cash Flow

 

 

82% of small business failure are due to poor cash flow management.
 
Understanding how much money is going in and out of the business seems like a simple concept, but it becomes complicated when you don’t have solid sales projections or when several clients doesn't pay on time.

4. Not Analyzing Prices

 

 

Every business owner can relate to the pain of pricing their products or services.

There is an art and a science to pricing, which means you can’t rely on intuition or pull numbers out of a hat. Overprice and the customer may not buy, underprice and you wont turn a profit.

5. Mixing Personal and Business Finances

 

 

 

One in five business owners use the same bank account for business and personal finances.

While it might not seem like a big deal to mingle those dollars, neglecting to keep your business and personal finances separate complicates your ability to track household bills, deductible business expenses, and revenue generated by the company.