Six Financial Planning Mistakes Small Business Owners Should Avoid

Six Financial Planning Mistakes Small Business Owners Should Avoid

Much of your business hinges on your ability to manage your finances

Six Financial Planning Mistakes Small Business Owners Should Avoid
Monday, 31 May 2021

Entrepreneurs are inspired to start a small business for a variety of reasons. Perhaps they’re seeking freedom, a better lifestyle, or maybe they simply want the ability to be their own boss. Whatever the reason, many jump into entrepreneurship without mastering financial planning. The result is that small business owners end up making financial mistakes that hinder them from enjoying the sustainable and scalable growth essential to the long-term success of their business.

Failing to plan the finances of a business properly means higher chances of start-ups failing during the first few years of operation, whether due to the cash flow drying up, unexpected expenses that can’t be covered, or an overwhelming amount of debt rapidly accumulating.

Below, we’ll go over six common financial planning mistakes that small business owners make and how you can avoid them in your own business.

1). Not Separating Business and Personal Finances

One of the biggest mistakes a business owner can make is to mix their personal and business finances. While it may be tempting to make personal purchases using your business finances or vice versa, doing so can leave your business at serious risk of financial complications down the road. Mixing finances can make keeping an accurate record of your accounts more complicated, especially when it’s tax time. You may be forced to spend copious amounts of precious time, energy, and money going through all of your bank statements and receipts to separate the two expenses. What’s more, mixing finances can also hinder you from applying for a business loan, should you need to, as it will be difficult for you to show your bank account history. Failing to separate the two expenses makes financial planning increasingly unmanageable in a multitude of ways.

A smart way to keep your personal and business finances distinct is to open an entirely separate financial account and apply for a business credit card. This will not only help you keep track of business spending, but it will also help you gain greater insight into how your business is actually performing.

2). Financing Capital Expenditure Out of Cash Flow

Many small business owners end up financing major capital items out of cash flow, rather than using cash flow on the lifetime of a purchase. We recommend financing items out of your day-to-day working capital instead, especially if you intend to sell them in the short term. However, if you are making a big purchase, such as a large piece of machinery with a ten-year life span, then you should look to finance it for the same number of years.


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The best way to measure your cash flow is with your spending. If you use income, then your company risks ending up in a bind should any customer payments be delayed or any supply chain issues arise. Try to hold off on going out and buying that flashy Mercedes Benz or vacation home after one good quarter, unless you can be 100% sure that your strong sales will continue.

3). Not Establishing an Emergency Fund

One of the most significant ways you can leave your business unprotected is not having any savings available in your bank account. Most small businesses fail during their start-up years due to lack of – or misuse of – capital. That’s why it’s so incredibly important to have an emergency fund to lean as needed.

It may seem overwhelming to establish significant savings for your business, but once you begin it can be incredibly simple. Start putting money away into an emergency fund as soon as cash begins rolling in and grow your fund slowly along with your business. Not only does doing this set you up for any unexpected events that come in the future, but it also teaches you the basic mechanics of budgeting for your business. The more money you put into savings, the savvier you’ll get with doing less with more and getting by with what you have.

We recommend that your emergency fund should be large enough to cover up to 3-6 months of operating costs on hand without you having to incur new or additional debt.

4). Paying Too Much Tax

The U.S. tax system is incredibly complicated, especially for businesses. That’s why it’s common for businesses to unknowingly overpay on their taxes. This can become even more likely to happen if your business isn’t structured properly.


SEE ALSO: Small Business Owner Retirement: What to Do and When to Do It


The best way to ensure that your business is maximizing on any available tax benefits and minimizing its tax burdens is to speak with an accountant or a financial advisor that you trust. Hiring a tax expert can mean saving more money than expected for your business, making a world of difference. Be sure to keep your books organized and maintained throughout the year to make this process easier for everyone involved.

5). Cutting Costs Rather than Increasing Revenue

When it comes to improving profitability, one of the first things small business owners tend to try is cutting costs. While this can certainly help, there is a limit to which expenses can be cut. Ultimately, your expenses should be viewed as a resource for generating income, rather than a financial burden of the business. There’s a way to maximize your revenue by using your expenses productively.

It may not seem like it, but if you’re able to manage your growth within the limitations of your cash flow then the opportunities for revenue growth are endless. Take a step back and think about why you may not be generating as much revenue as you’d like and then make the necessary adjustments. Try to think of ways to do this outside of cutting costs. Consider the main driving forces of revenue, such as the number of customers your business is handling, the number of times those same customers are buying your goods or services, and the average sale each of those customers made each time they bought from you.

Work to develop creative strategies that you can implement to increase each of these measures, and your revenue will flourish.

6). Failing to Plan 

It’s going to be incredibly difficult to run a successful business without having a strong understanding of the direction you want the company to go in or what your ultimate business goal is. It may sound simple, but having a working budget or a cash flow forecast that is updated and continued every quarter is crucial to the success of a business. Be sure to include information such as sales, variable costs, and fixed costs in your budget plan. Set aside time each month to look over your budget, see whether it’s still working for you, and make any changes or updates necessary as the business grows.

A cash flow focus can help you estimate your financial position in the future after you’ve completed your budget. Take into account how long customer payments take, how long you take to pay for your suppliers, how fast you turn over inventory, any loan repayments due, and any estimated capital expenses not appearing in your budget’s profit and loss account. Having the ability to look into your business's cash inflows and outflows can provide you the opportunity to prepare your business for its financial future.

Lastly, if you foresee your business needing a business loan, be sure to take the time to complete a budgeted balance sheet.

Concluding Thoughts 

As a small business owner, you likely have a lot riding on the success of your business. Most entrepreneurs put all their dreams, hopes, and savings into their businesses with the goal of achieving even more in the future. However, owning a business is incredibly hard work and it requires you to balance many ever-changing factors. One of the best ways that you can ensure your small business is successful is to have a strong and solid grasp on your financial plans.

The tips above are meant to guide you through your financial planning. However, the best way to ensure that your business's financial future is secure is to sit down with a professional. At Charles Carroll Financial Partners, we are committed to helping our clients thrive financially, both in business and in their personal lives. If you’re an entrepreneur looking to set up your small business for success, please reach out today to set up a conversation with one of our professional financial advisors.

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