Being a new business owner means you may get so much unsolicited advice from ‘experienced’ business owners who know the ins and outs of managing a small business. However, it is important to remember that your business and situation may differ from everyone else, and what may work for them might not work for you.
This article will discuss some of the worst advice you can get in managing your small business’s finances and alternatives to what you can do instead.
Do it all yourself
Many business owners will tell you to be hands-on with everything that goes on with your business and ‘do everything yourself’ for as much as possible.
This advice usually comes from a place of distrust. For a company or business to do well, it needs to move forward with a team that trusts in each other’s specialties and abilities to improve the business.
Roman Zrazhevskiy, Founder & CEO of MIRA Safety, says, “Having a separate trusted accountant will free your hands from the trouble of extensive financial recording that you can otherwise use for planning more efficient business operations and expansion, filing for taxes, and dealing with the IRS regarding tax computation and filing.”
You can monitor your finances effectively if they’re consolidated
The first thing you should know as a business owner is how to separate personal income from business income. You should have at least one account for your personal finances and another for your business finances because of the following reasons:
- The IRS may inspect your bank accounts as part of tax investigations, and a consolidated account may result in paying more taxes.
- You can get a clearer picture of your business’s cash flow with a separate business account.
- It makes the accounting process and tax computation easier.
- It protects your personal assets from legal liability.
Taking out a loan is bad for your business
Many people think taking out a loan always means your business is not doing well. That is, in fact, one of the biggest fallacies when it comes to managing your business finances because loans can significantly leverage your cash flow for more value-adding investments and raising capital for your business.
Some of the benefits of taking out a loan (and paying them on time) include:
- Increase your working capital
- Build good credit
- Better access to funds at lower interest rates
- Improve your business’ creditworthiness
- Invest in significant business equipment
- Get tax benefits on qualifying loan interest payments
You need to forecast several year’s worth of financial projections from the get-go
If you are a start-up small business, stop wasting your time projecting financial targets and cash flow for three to five years ahead in the first few years of your operation.
According to Jeffrey Zhou, CEO and Founder of Fig Loans, “For small business owners, it is crucial to invest your time in improving current business operations, seeking areas of improvement, managing resources, and developing an action plan that would increase and expand your market—rather than planning for years of financial data ahead without stable operations and market on hand.”
Avoid taking loans from the alternative lending marketplace
The alternative lending marketplace includes many types of loan alternatives, including freight factoring, merchant cash advances, invoice factoring, crowdfunding, bridge loans, microloans, direct private lenders, online lenders, and equipment financing.
Jim Pendergast, Senior Vice President at altLINE Sobanco, says, “In an apples-to-apple comparison of interest rates and fees with traditional banks and financial institutions, alternative lending methods may seem the worse option. However, considering the hefty application requirements, processes, and collaterals, many may find alternative lenders the better option, especially regarding quick access to funds.”
Cutting back on spending (all the time)
For small business owners, it is important to acknowledge that one of their biggest financial challenges is managing their resources and costs at an optimum level while not sacrificing the quality of their products and services or their people.
Smart business owners should acknowledge that cutting back on spending (all the time) should be a last recourse in managing their finances because, believe it or not, cutting back on costs can often do more bad than good.
Alan Parkes, Owner of Denver Roofing & Colorado Springs Roofing, says, “For example, traditional business owners think that reducing manpower and not retaining talent would significantly increase their net profit because of reduced manpower costs. However, the other side of the spectrum would reveal that manpower reduction may decrease operational efficiency, resulting in poorer quality of products and services.”
Pay all your taxes
We’re not saying that you shouldn’t pay your taxes (because you should), but paying them smartly is different, especially for small business taxes.
Chris Aubeeluck, Head of Sales and Marketing at Osbornes Law, says, “Through the help of expert tax accountants, you can leverage several IRS interpretations to legally reduce your taxable income through tax minimization schemes, like participating in employer-sponsored plans like 401(k), donating to charities, opening a health savings account (HSA), or including your travel-related expenses as a business expense.”
Conclusion
Starting a small business is a huge challenge for new and seasoned business owners. Managing finances, in particular, is a huge burden for most business owners because situations differ from person to person, and not all advice would help your business as much as it helped theirs.
You can carefully assess your business structure, financial situation, and product offerings to assess what financial management tips would work best for your business without compromising product and service quality.
