Staying in business means avoiding these financial mistakes

It’s not news that more than half of all small businesses fail in the first five years. Most attribute that to a lack of demand, but the reality is that most fail due to financial mismanagement.   

 The good news? By understanding common financial mistakes, you can avoid costly errors and set your business up for long-term stability.

Today’s post will dive into some of those pitfalls and show you how to steer clear of them.

Let’s go! 

Mismanaging Cash Flow

One of the biggest mistakes small businesses make is focusing solely on revenue and profit while ignoring cash flow. 

If you’re not sure of the difference, think of it this way.  Cash flow is what you have in your checking account right now to cover your bills. Profit is what is left at the end of the month. 

Even a profitable business can fail if it runs out of cash. 

Without enough liquidity, you can’t pay bills, employees, or suppliers. 

To avoid this, track cash flow regularly using tools like QuickBooks or Xero to help maintain a cash reserve for emergencies. 

Most importantly, get good payment terms for the services you render. The longer your client takes to pay, the more precarious cash flow becomes.  So set clear payment terms and follow up on overdue invoices.

Ignoring Financial Reports

Another common mistake is not reviewing financial statements or only glancing at them during tax season. 

This is all too common among new entrepreneurs, and most of it comes down to a lack of knowledge about financial reports. That’s understandable. 

Work with a CPA to stay on top of financials and regularly review your profit and loss statement, balance sheet, and cash flow statement. You don’t have to go it alone. A good CPA can help you make sense of these documents so you can start using them in your favor. 

Working with a CPA can also help you interpret financial data and adjust strategies. 

Speaking of strategies, let’s look at the next common error. 

Poor Pricing Strategies

Setting prices too low to attract customers or too high without market justification is another financial misstep. 

Undervaluing your offerings reduces profitability, while overpricing can drive customers away. 

To avoid this, conduct market research to find competitive pricing. Calculate costs and margins to ensure your pricing supports profitability and adjust prices based on demand, operational costs, and market trends.

 Bad Debt Management

Extending too much credit to customers or relying too heavily on business debt can create significant problems. 

To manage debt effectively, set clear payment terms and enforce collections policies. 

Monitor outstanding invoices and follow up on late payments. Remember, you’re a business, not a bank. 

 And always use debt strategically.  Know your debt-to-income ratio, and don’t let it spiral out of control. 

Failing to Plan for Taxes

Many business owners don’t set aside money for taxes and get caught off guard by a large tax bill.

That’s why working with a CPA to estimate quarterly tax payments is so important. The IRS  also provides a helpful guide on estimated taxes for small businesses to help you stay on track. 

Most importantly, work with your CPA to have an overarching tax strategy that helps you avoid problems and recognizes opportunities to improve your bottom line. 

The Bottom Line

Financial management isn’t a one-and-done task—it’s an ongoing process. By being proactive, you can avoid these common mistakes and land in the half of new businesses that keep going after five years.