No matter the size of your business, from a high-traffic bricks and mortar to a home-based Etsy store, there are always ways that you can be handling your business finances better. No matter what your profit, there are five major money mistakes you can make. Over the next few weeks, we will discuss these different business money mistakes and how to correct them.
Mistake #1 – Starving Your Business
Everyone likes to get paid. No matter what the bottom line is at the end of the month – $1 or $100,000 of profit, there is always the temptation to take the business profit as your personal income. It is natural. You are putting a lot of time in and want to be rewarded for your hard work.
You also have a pretty good idea of how much it costs to run your business per month, so you feel comfortable taking a draw from your profits. This is great if you have a steady business and are happy with where you are financially. If you take a consistent income every month, then you are set.
But is your business suffering from stagnation? Are you not feeding your business to help it grow?
But when you look at your profit, you are merely looking at your expenses verses your income, you don’t really see the big picture. You also need to consider how much of your profits need to be re-invested into your business. Having a long term goal and business plan for your business is important, but you also need to make sure that you have the financial plan for your business as well.
Here are some things to consider when you are determining what portion of your profits needs to be set aside for re-investment:
- Do I need working capital for the coming months? Does my income fluctuate with the season?
- Do I need to purchase more inventory or materials? Can I buy things in larger quantities to increase my profit margin?
- Do I have any large purchases or bills coming up that I will need a lump sum for?
- Have I identified any other ways to increase my business that I have been holding off on because of the cost?
Once you have answered these questions (and more, based on your type of business) start to work out a plan for your expected large expenses (Bigger, better equipment? Maintenance? License fees?), business building purchases, and cash flow for changes in seasonal income. Plot these out on a calendar or in a spreadsheet.
Once you have an idea of what the financial outlay for all of your business building needs during the year, tally that number. Then divide it by 12 months. This is the amount you should add as an expense to your profit and loss as a savings expense. Then take that amount from your profits before you decide what your personal income will be. If there is nothing left, then maybe you really shouldn’t be taking a draw.
Always remember to feed your business first. If you want to help it grow and create a more consistent income for you long term, you need to take care of it and make sure it has what it needs to grow.
Next – Poor Investment Strategy