Every new business starts off seeing blue skies ahead. But many small-business owners become the victims of common financialmistakes, says Alice Magos, a senior writer and small-business analyst at CCH in Chicago who runs the Business Owner's Toolkit.
Here, she warns of five common financial mistakes that small businesses make.Under-capitalization
It's the cardinal sin of new businesses, says Magos. "Insufficient start-up capital dooms the venture and jeopardizes family living expenses," she says. Before launching abusiness, make sure you have the cash on hand to see you through until you land customers and they start paying their bills.
Many new businesses make wildly optimistic forecasts offuture sales, Magos says. To survive, you'll need detailed financial estimates that include pricing strategies, direct- and variable-expense estimates, and cash-flow planning. When in doubt,underestimate your sales and overestimate your bills. You'll also need to analyze your target market and do a run-down of your competitors.
Failure to Keep Timely and Accurate Records
"Ignorance is not blissin business," Magos says. Failing to keep timely records leads to problems with the IRS and the threat that you'll overlook serious problems down the road. "Accounting records tell you what's goingright and wrong and give clues to possible future pitfalls," she says.
Failure to Manage Cash Flow
Excess inventory, poor accounts receivable management and poor credit policies can render bankruptan otherwise viable venture. "These are the culprits that tie up your cash," Magos says.
Lack of Adequate Insurance and Risk Management.
A lack of planning for the worst-case scenario can "invitedisaster in both your business and personal life," Magos says. Choose the best legal entity possible to limit your personal liabilities. Use insurance to transfer risks. And remember to budget for...