Geared with energy and pouring ideas, most businesses are similar —they started as a mere aspiration from their owners. But why have some businesses led towards success, and some failed? Here are some money habits of business owners that you should take note.
The journey to a successful business is a rough road. We all know that managing finances is just one of its critical components. However, some entrepreneurs unconsciously develop bad money habits that hold their businesses back.
If you are a business owner, do not let these habits lead you to failure. Beware of these nine (9) money habits of business owners that keep profits low.
9 Bad Money Habits of Business Owners
Failing to track expenses and revenue
Tracking expenses and revenue is vital for any business. However, many small business owners fail to do so correctly, either due to a lack of time, knowledge, or tools. As a result, they make financial decisions based on incomplete or inaccurate information, which can lead to financial losses.
Mixing personal and business finances
This is typically a common money habit of business owners who are either new to the industry or own small businesses. This can lead to a lack of clarity regarding business finances, making it challenging to measure profitability or keep track of expenses.
Not having a budget or financial plan
Without a budget, business owners may not have a clear view of their cash flow, which leads to overspending, insufficient cash reserves, or missed opportunities to invest in growth or expansion.
Overspending on unnecessary expenses
One of the money habits of business owners who fail is overspending on non-essential expenses, such as fancy office spaces or expensive equipment, thinking these will help their business succeed. While investing in your business is crucial, overspending can create an unnecessary financial strain that may harm cash flow and profitability.
Prioritising expenses that align with the business goals and avoiding frivolous spending can help the business maintain a healthy financial position and improve financial performance.
Underspending on essentials
Overspending is not the only bad money habit that a business owner can have, underspending is as well, and this can be detrimental to a business.
While saving cash for operations or expansion opportunities is good, essentials like accountants and other professionals needed to support a business should have an allocated budget too. Some business owners see these expenses as non-essential and often insist they can do the tasks instead of paying experts.
Doing clerical and administrative tasks themselves might save money, but it wastes the valuable time they could use to focus on growing the business.
Ignoring or procrastinating on taxes
Taxes can be a complex and daunting topic for many business owners. However, failing to address them can lead to penalties, interest, and legal issues that harm a business.
It’s essential to be up-to-date with tax laws, deadlines, and regulations to ensure the business remains compliant. Seeking the help of a tax professional can be beneficial, especially when dealing with complex tax situations or changes in tax laws.
Not diversifying income streams
Many businesses rely on a single source of income, which can put them at risk of financial instability if that source of income dries up. Diversifying income streams can help protect against economic downturns, industry changes, or shifts in consumer behaviour.
By expanding product or service offerings and targeting new markets, business owners can reduce their reliance on a single income source and increase their overall revenue.
Not negotiating with vendors or suppliers
There could be several reasons why business owners may choose not to negotiate with suppliers, such as:
- Lack of knowledge or experience in negotiation
- Fear of damaging the relationship with the supplier
- Belief that the supplier’s prices are already fair or reasonable
- Time constraints
- Preference for convenience
However, not doing this can negatively affect a business, such as increased costs, reduced profitability, as well as missed opportunities for cost savings and improved supplier relationships.
Taking on too many loans
The most common bad money habit of business owners is taking on too many loans. While it may be tempting to take on debt to finance growth or expansion, taking on too much debt can lead to financial problems down the line. Some of these are:
- High-interest payments
- Risk of default leading to forced bankruptcy
- Limited financial flexibility to invest in new opportunities, make capital improvements or control unexpected financial challenges
- Risks on personal finances (e.g., use savings, sell assets, or take on additional debt to stay afloat)
Frequently Asked Questions
How do break these bad money habits of business owners and improve their financial situation?
After identifying some of the money habits that hinder the success of business owners, we will also provide some habits to counter them:
Create a budget
A budget is a critical tool to help business owners manage their finances. It allows them to track their income and expenses, identify areas where they can cut costs, and make informed financial decisions.
Avoid unnecessary debt
Business owners should avoid taking on debt for non-essential expenses. While debt can be helpful in some situations, such as for business growth, it can quickly spiral out of control if not managed properly.
Seek professional advice
Consulting with an accountant can help business owners make informed financial decisions and avoid common money mistakes.
What are some common mistakes new entrepreneurs make when starting a business?
Some new business entrepreneurs make mistakes by underestimating the costs of starting a business, failing to conduct market research, not having a solid business plan, and trying to do everything themselves instead of delegating tasks.
What is the best way to save money in a business?
The best way for business owners to save money is to create a budget, track expenses, negotiate with suppliers, look for ways to cut costs and take advantage of tax breaks and other financial incentives.
It is essential to build a strong financial foundation to sustain a business long-term and achieve its goals. However, business owners generally are unaware of the poor finance habits they make that potentially hold their business back.
But with enough financial knowledge and by seeking professional advice, they can lead their business toward success. Check out our services at Sterlinx Global.