The #1 Mistake Many Small Business Startups Make
The reality of running a company usually catches up with business owners when they get hit with a large, unexpected tax bill or run out of cash.
Starting a business is often the easiest part. Many entrepreneurs operate as sole proprietors without even establishing a legal entity, such as a limited liability company (LLC) or corporation. Starting a business may be easy, but successfully running one is often not.
Reality usually catches up with business owners when they get hit with a large, unexpected tax bill or run out of cash.
Managing a company, whether it is fast-growing or well-established, is not as simple as it may seem. There are many pitfalls, particularly when the fundamentals are neglected.
One of these fundamental tasks is bookkeeping.
Most business owners find bookkeeping daunting and often postpone it until the last minute, resulting in them delivering a shoebox full of receipts to their accountant.
Ignoring the need to update the finances throughout the year is a big mistake and can create significant blindspots, potentially leading to disastrous consequences.
The good news is that entrepreneurs don't have to maintain their finances on their own. They can outsource this task to a professional bookkeeper. Many accountants also provide this service.
Do You Know How Much Money Your Company Makes Each Month?
If you don't know your monthly profit (net income), which products and services contributed to this profit, and the amount of profit converted to cash (cash conversion ratio), your bookkeeping probably requires a significant upgrade.
Improving your bookkeeping will give you the financial transparency necessary to manage your business effectively and make better decisions.
Relying on the Amount of Cash in Your Checking Account Can Be Fatal
When small businesses make decisions, they often base them on the amount of cash in their business checking account.
If their available cash has grown since the last time they looked, they assume that the company has made a profit and everything is fine. It's like flying an airplane without instruments just by looking out the cockpit window. It works until it doesn't.
Many don't realize the seriousness of the situation until their cash is down to the point where paying bills, credit cards, and staff or repaying debt becomes impossible.
Businesses that track their monthly profit are in a different position. They fully understand why their cash has increased or decreased compared to the last month and have enough time to react to any issues. It is like flying an airplane, but, this time, they know their exact altitude, speed, position, and how much fuel is left.
Don’t Put Off Your Bookkeeping! If you have trouble answering how much money your company makes monthly and what its profit drivers are, your bookkeeping probably needs an upgrade.
How to Prepare Your Business for Growth: Many small businesses are not prepared to add employees and grow. Their workflows are too founder-centric.
Business Ownership Is an Opportunity, Not a Guarantee: 45% of businesses fail during the first five years. Avoiding these 7 common mistakes can help companies stay on the path to success.
How Much Should You Pay Yourself as a Small Business Owner? The free-cash-flow method can help estimate the amount of money you are safe to take out of your business.
