Common Financial Mistakes That Can Hurt Your Small Business

Operating your own small business is, in many ways, much more rewarding than working at a standard day job. You have the opportunity to see your groundbreaking ideas leap off the page and into reality while providing valuable products and services to your community.

However, owning a small business is also a hefty responsibility. As a business owner, you must keep a close eye on your finances to prevent trouble in the future. These common financial mistakes have the potential to do long-term damage to your small business; learn what they are so you can avoid them.

Failing To Plan

It may sound like a cliché, but failing to plan for emergencies is essentially planning to fail. As you allocate your business funding toward different departments, reserve a savings account for emergency expenses. Disasters like theft, data breaches, and weather-related property damage are difficult to predict, but it’s wise to have some money stashed away for unforeseen circumstances.

In the same vein, as you set up your business, make sure you have adequate insurance. Commercial property and business interruption policies can provide valuable relief in the event that catastrophe strikes your business.

Making Large Purchases Too Soon

Starting a business does require a great deal of setup—and cash to fund that setup. From staffing your office to buying inventory, you’ll have a lot of spending to do. But in the early days of your business, you also need to watch your budget with a keen eye.

Just because you require a large piece of equipment in order to operate doesn’t mean you need to buy it outright to get started. You can always finance or rent your equipment to save money, and when you’re ready to purchase, shop around for the best possible pricing. When your business is in its early days, start with only the items you can’t operate without—you can always expand later.

Buying Too Much Inventory

Do you run a retail business? Buying inventory in bulk may seem like a money-saver, but if those items don’t sell, you’ll end up with a stockpile that takes up valuable space. It’s very easy to order excess inventory when you don’t closely track stock, which leaves you cash-strapped in the short term.

Before you buy inventory for your business in large quantities, determine how likely those items are to sell. Keep your finger on the pulse of trends in your industry, and prepare to put some products on sale if they start to languish on your shelves.

Taking On Too Much Debt

While accruing debt and paying it off promptly is essential for building a healthy business credit score, be wary of taking out too many loans early on. Having several small debts to various lenders and vendors also means you’re paying several separate interest rates on those debts.

If you need a large amount of startup capital to get your business off the ground, try to take out a single loan so you’re only paying one interest rate. You can also use your retirement account for 401(k) business financing to avoid the loan repayment process altogether.


Are you already feeling the pressure of multiple debt repayments? Talk to your creditors and see if you can work out a consolidation arrangement. Learn to recognize when you’re in financial trouble so you can ask for help as soon as possible.

Mixing Business and Personal Finances

Many small business owners utilize their own personal funds to inject cash into their venture, especially in the early days. However, you’ll have a hard time gauging your business’s financial health if those finances are all mixed up with your personal ones.

Create a firm distinction between your personal accounts and your business funds. Set up accounts in your business’s name and use that money solely for business-related expenses. This way, if your business falls on hard times, your personal credit score won’t take a hit.

Understaffing Your Office

Your business is your brainchild, and some entrepreneurs find it difficult to delegate responsibilities to other people. But wearing too many hats in the short term can lead to burnout and exhaustion in the long run. Get used to handing off smaller tasks to a robust staff of employees instead of trying to do everything yourself.

In addition, consider that some individuals have business-related expertise you simply don’t. The services of a professional accountant, for example, can be more beneficial to you than saving a little money by doing your books yourself.

Underpaying Your Staff

When it comes to money management, you may think that paying your employees minimum wage, or close to it, will save you valuable cash. This is true in the short term, but consider your employees’ morale and job satisfaction as you determine wages. Underpaid employees will quickly grow tired of working so hard for so little money, and they’ll eventually leave to seek out better wages.

High turnover rates at your company spell potential financial troubles. Hiring, onboarding, and training new employees on a revolving-door basis will ultimately eat into your profits. Save money and retain a happy, high-quality staff by providing adequate pay and benefits, as well as opportunities for raises and promotions.

Not Choosing a Legal Structure

As you fill out the necessary paperwork to officially start your business, don’t forget to choose a legal structure. If you’re using your 401(k) to finance your venture, for example, you’ll need to set it up as a C corporation to facilitate the rollover.

Failing to choose a legal structure for your business means that the IRS will view your company as a sole proprietorship. This can prove problematic if you fall on hard times because you will personally be on the hook for any legal or tax troubles you encounter. Plus, your business will look unprofessional on paper since your own name and social security number will appear on business paperwork.

Are you dedicated to setting up your small business for success from the very beginning? There’s plenty of valuable advice out there regarding what you should do as a small business owner. However, it’s equally important to know what not to do.

The common financial mistakes detailed above can seriously hurt your small business in the long term. Luckily, you now have the knowledge necessary to avert these mistakes and focus on your business’s financial health.

Wondering about the business funding options available to you? Head over to Pango Financial’s funding solutions tool for more information.

Common Financial Mistakes That Can Hurt Your Small Business