A long time ago, in a galaxy far, far away, I practiced law. My practice dealt mostly with small business, and mostly it was fun – helping new entrepreneurs start their ventures, helping them get financing for expansion, that sort of thing. But, of course, given the nature of the gig, not all news was good news. I certainly had my share clients who needed help getting out of hot water.
None of them planned on getting in over their head of course; no small business owner does. But good intentions are not enough. The problem is that, generally speaking, seemingly small money mistakes turned into big business problems because the owner didn’t take the time to correct the problem before it got out of hand.
It is no secret that being in business for yourself also means that you will make mistakes; mistakes and business go hand-in-hand. So the question is not whether you will make a mistake (or two or three), but whether that mistake will be minor or major. Minor we can live with, major, no so much.
Here then are the five money mistakes small businesses make most often, and how to avoid them:
- Not controlling overhead. Back in those lawyer days, the one thing in common that most of my bankruptcy clients shared was that they did not control their spending. When money was flowing freely into their business, spending, of course, was easy. The problem came when they were hit by the inevitable business cycle and they were unprepared for any sort of business downturn. It was then that their free spending ways caught up with them.
The lesson is clear, and easy to implement: Keep your overhead low.
- Thinking small. A seemingly opposite problem is that not a few small business people start out doing everything themselves and never get out of the habit. And the problem with that is that it truncates growth.
Getting the help you need, and preparing for and landing bigger contracts requires that you have a vision and think big.
- Not diversifying. As an investor, would you ever own just one stock? Of course not, because you know that that stock could go up, but it could also go down. Putting all of your investment eggs in one basket is far too risky, and that is why financial advisors always suggest that folks “diversify their portfolio.”
Well, the same is true for your business. If you only have one profit center – one main product or service – you are doing the business equivalent of owning a single stock. The answer therefore is to create additional profit centers – new ways of generating income.
- Not incorporating. The next two mistakes are tied-in with one another, but need to be separate entries because they are not exactly the same. Here, the issue arises when a small business is run as a sole proprietorship or partnership and not some sort of corporate entity – an S or C corporation, or an LLC.
When you incorporate, you create a separate legal entity, and that in turn protects your personal assets from business liabilities; business problems will not threaten your personal assets (like your home.)
And the Number 1 money mistake small businesses make is,
- Not separating business and personal credit. By the same token, far too many small business people do not separate their personal credit from their business credit, or, worse, fail to create separate business credit altogether. As with not incorporating, not only does not separating business and personal credit put your personal credit and wealth at risk, it stifles your business’ growth.
The good news is that if you avoid these five mistakes, the chances of ending up in your lawyer’s office for the wrong reasons will be slim.