After hosting Dave Ramsey's Entreleadrship Simulcast on Friday, I was asked the same question twice. What are the three most common errors you see small businesses make? Great question. The three most common I see in my office are all related to each other. First I see entrepreneurs mixing personal and business expenses. I will confess that in the early years I was guilty of the same thing. I would pay the car insurance bill out of the business account and fill up the car with the business credit or debit card. Commingling funds hides the true state of both your business budget and your household budget. Having separate budgets for both home and business are critical. How can you know how much profit you have at the end of a month if you cannot record all of your costs correctly? Likewise, how do you know how much it costs to run your home if you are hiding costs for items such as insurance, gas, utilities and more within your business. In fact, if you have an LLC or are incorporated, you could be compromising your personal veil of protection if the government deemed that you have used business fund to support your personal lifestyle.
This leads to the second huge error I see, not setting aside money for personal and business taxes. Please don't get me wrong, I don't like paying taxes and I don't want to pay more than I owe, but I do know that I must pay taxes on every dollar of income or profit that I take in. What I see happen every week is that people do not set asset at least 25% for quarterly taxes and use the money as if it were their own to support a lifestyle that is a little more than they can afford. Then when taxes come due, they have a huge number to come up with. Please just start the habit of opening up a separate account for taxes and set aside 25% each month. This will reduce your stress.
The last mistake is debt. The late Larry Burkett stated that 60% of all businesses become unprofitable once their interest rates reaches 15%/. Think about it, most business are considered a success if they have a 5% to 10% profit margin after taxes at the end of the year. Now add an additional ten to fifteen percent debt burden and the company is now operating to pay debt payments. We win and loose sales and contracts by just pennies on the dollar. If your company has to carry a large debt burden it may not be in the position to successfully and profitably gain the next order.
This is just what I have seen from my side of the desk and as the owner of two small businesses and business coach. Remember, we are not just in the business to make money but also to keep some and enjoy it.