Financial Mistakes #1
Q: Steve — I am an accountant and work with a lot of small businesses. Some of these owners are quite financially sharp, while it is amazing to me that others even stay in business. Do you think there are some common financial mistakes entrepreneurs make?
A: Small business owners generally do not have an MBA. Most (myself included) started a business because they found something they loved and wanted the freedom to do that thing as they saw fit, without encumbrances or bosses.
Yet, while one small businessperson may be a great marketer, and another a savvy negotiator, it is true that not all are financially astute. So yes, I do think there are some financial mistakes that are common and can easily be avoided.
1. Piling on the credit card debt. Yes, credit cards are wonderful inventions, making life easier in many ways. But they are also the proverbial double-edged swords. Interest payments of 15, 16, 17% can quickly cripple your business. Most people who file bankruptcy do so because they let their credit card debt get away from them.
2. Failing to diversify the business. You must have multiple profit centers. The problem with relying upon just one profit center is that a single profit center can go up, or it can go down. If you have several different profit centers, several ways to bring in a buck, then the chance of taking a huge financial hit is much more remote. When one profit center takes a dip, you will have others still to keep you going.
It's akin to being a stock investor and only investing in one stock or in one segment of the market. Pity the poor fool who had all his money in the tech sector in March of 2000. Don't make an analogous mistake with your business.
3. Being improperly insured. Why are you working so hard? A main reason, I bet, is that you want to ensure the financial future of your family. Well, maybe the easiest way to do that is to properly insure your business and your future. Imagine what would happen if disaster struck and you were not covered by insurance.
Meet with your insurance broker and make sure that your business is properly insured. Do you have enough liability insurance? Do you need errors and omissions, or directors and officers insurance? What about business interruption insurance?
Finally, be sure to buy some term life insurance. For about $100 a month, you can make sure that your family will have $1 million if the Grim Reaper shows up a tad too soon.
4. Failure to pay yourself first. Yes, you have a lot of bills. Join the club. But before you pay any bill, take any trip, or buy any car, you need to pay yourself first, every month. 10% of your net income should go towards investments, no matter how much or little you make.
5. Having a will instead of a living trust. A will is a public document that guarantees that lawyers and court fees will immediately take a big chunk of your business and you're your assets when you die but that your loved ones won't get a thing for about two years. A living trust is a private document that will transfer your assets to your loved ones immediately upon your death, sans lawyers and fees.
6. Not handling your paperwork right: Do you have your W-2s in order? What about your 1099s? Do it right, here.
Today's tip: What is the biggest difference between the rich and poor businessperson? I think one big difference is that that the latter does not understand the difference between an asset and a liability.
Here's a quiz: Is a new car, financed at the dealership, an asset or a liability? It's a liability for two reasons. First, the car will depreciate (rather quickly), not appreciate. Second, the car payment is a drain on your wallet. So assets are investments that make you money, liabilities are things that cost you money. Period.
© 2010 Steven D. Strauss, “America’s small business expert.” www.MrAllBiz.com