Inflation & hiring challenges force small businesses to react

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Small Business Insights: Inflation and hiring challenges force small businesses to react

Our latest Small Business Insights report looks at the big issues facing U.S. small businesses today, starting with inflation, hiring, and the ongoing economic recovery from COVID. Dive into the key findings below by using the chapter links.

Inflation

Most small businesses (96%) are concerned about inflation. The top three cost pressures are materials, equipment, and labor. This may be why almost three out of five small businesses (57%) want to raise prices this fall.1

Hiring

Most small business workforces continued to grow in August, but the overall rate of growth has slowed since June. Workforces are currently growing fastest in the information industry, which includes software development. Wages are currently rising fastest in public administration organizations which oversee government programs.2 

Recovery

The economic recovery from COVID became more widespread through June and July. Even some of the hardest-hit businesses — including restaurants, clothing stores, and hair studios — are bouncing back. But many travel and entertainment businesses are still struggling.3

Risks

Despite high levels of optimism, small businesses still see the economy as their number one threat today. Rising costs and low demand are creating cash flow problems for some.1

Adaptation

Almost half of small businesses (49%) have remote workers and the number looks set to grow. Almost four out of five (79%) say that investing in digital technology makes them more likely to succeed.1

Growth

Almost two-thirds of small businesses (65%) predict their business will grow this fall. Ecommerce businesses continue to be more upbeat than businesses which do not sell online.1

More than 9 out of 10 small businesses are concerned about inflation 

New data1 from a recent survey commissioned by QuickBooks reveals the top three cost pressures small businesses face today are:

  1. Materials

  2. Equipment

  3. Labor 

Overall, more than nine out of 10 small businesses (96%) are concerned about inflation. More than four out of five (85%) are concerned about the cost of labor. Despite this, many have recently increased wages2 to tackle skills shortages. Our research suggests this trend will continue. Read more about this in the Hiring section.

Almost three out of five small businesses plan to increase prices

Perhaps in response to rising costs, almost three out of five small businesses (57%) say they will “definitely” or “potentially” raise prices this fall. Just 1 in 3 (33%) have no plans to make any price increases. For some, higher input costs are already contributing to cash flow problems. Read more about this in the Risks section.

Revenues are returning to pre-pandemic levels

In the face of rising costs, there is good news. QuickBooks customer data3 reveals that nationally, small business monthly revenues consistently beat their pre-pandemic benchmarks every month from February to July 2021. Since May, the recovery has become more widespread. Read more about this in the Recovery section.

Most small business workforces continued to grow in August

QuickBooks Payroll data2 reveals that small business workforces grew from July to August 2021 in all but four industries (construction, finance and insurance, utilities, and public administration).

The three fastest growing small business workforces from July to August 2021 were:

  1. Information, e.g. software development (+3%)

  2. Education, e.g. schools and training centers  (+2%)

  3. Professional, scientific, and technical services, e.g. lawyers, accountants, engineers, and architects (+2%)

Overall, the trend for small business hiring has been positive since March 2021 — but the rate of growth did slow through the summer months, potentially due to the impact of the Delta variant of COVID-19. The biggest gains since March 2021 have been in arts and entertainment, agriculture, and accommodation and food services.

Hourly pay rose fastest for real estate and public administration workers in August

Hourly pay went up in 10 industries from July to August 2021. The three industries that saw the biggest increases were:

  1. Public administration organizations which oversee government programs (+3% to $15.81/hour)

  2. Real estate, which includes rental and leasing as well as sales of property or equipment (+2% to $17.87/hour)

  3. Information, such as software developers (+2% to $18.00/hour)

If we look further back to see how hourly wages have changed over the past 12 months, we find that accommodation and food service workers have seen the largest pay increases. Between September 2020 and August 2021, median hourly pay increased by more than 8% — from $12 to $13. At the other end of the scale, median hourly pay has not changed at all over the past 12 months in the arts and agriculture industries.

Which workforces contracted most during the pandemic?

By comparing average employee numbers in August 2021 against their pre-pandemic benchmarks in August 2019, we find that just four industries currently have smaller workforces than they did before the pandemic:

  1. Public administration organizations which oversee government programs (-3% vs pre-pandemic benchmark)

  2. Transport and warehousing, which includes passenger transport as well as cargo (-2% vs pre-pandemic benchmark)

  3. Management companies, such as holding companies and companies which advise and own stocks in other businesses (-2% vs pre-pandemic benchmark) 

  4. Other services, such as repair and personal services (-2% vs pre-pandemic benchmark)  

The three industries with the most growth over that period are:

  1. Professional, scientific, and technical services, e.g. lawyers, accountants, engineers, and architects (+5% vs pre-pandemic benchmark)

  2. Construction (+4% vs pre-pandemic benchmark)

  3. Retail (+4% vs pre-pandemic benchmark)

August was the first month during the pandemic in which accommodation and food service workforces returned to their pre-pandemic levels. The low point was in April 2020, when the average small business workforce was 17% smaller than the pre-pandemic benchmark (in April 2019).

More than 1 in 2 small businesses face skills shortages

Returning to the data we collected in the survey we recently commissioned1, we see that more than half of small businesses (51%) say it’s getting harder to hire skilled workers. Similarly, more than two in five (42%) say it’s getting harder to retain skilled workers. To address this, they are doing more than simply raising pay: 

  • 29% are offering more benefits

  • 27% are hiring younger workers than before

  • 26% are relaxing experience requirements

Looking ahead, almost one in two (48%) small businesses say they will increase pay for their existing workers during the next pay review. Two in five (40%) will offer larger bonuses. 

Small business recovery is taking hold

QuickBooks data3 reveals even some of the hardest-hit small businesses saw monthly revenues return to their pre-pandemic levels this summer. Nationally, monthly revenues were 25% higher in June than their pre-pandemic benchmark. In July, they were 6% higher. The drop may be due to the impact of the Delta variant of COVID-19.

Businesses that benefited most from the June uptick include: 

  • Bars and restaurants: monthly revenues were up 34% compared to their pre-pandemic benchmark, equivalent to an extra $14,000 per business. This almost put them in the top 10 best performing industries nationally for the month. Last year, in June 2020, they were in the bottom 10.

  • Clothing and accessory stores: monthly revenues were up 34% compared to their pre-pandemic benchmark, equivalent to an extra $6,000 per business. Like bars and restaurants, they were very close to being in the top 10 best performing industries nationally. That’s a huge turnaround from April 2020 when they were in the bottom 10.  

  • Hair studios: as previously reported, hair studios were among the hardest-hit of all small businesses in April 2020, when the pandemic’s economic impact was most severe. But through both June and July 2021, monthly revenues were back to pre-pandemic levels. In June they were up by 19%, equivalent to an extra $3,000 per business.

Travel, tourism, and entertainment business still struggling

Some small businesses, however, have not seen their monthly revenues get anywhere close to their pre-pandemic levels yet. These include:

  • Travel agencies: monthly revenues were 25% below their pre-pandemic benchmark in July 2021, equivalent to $3,000 less per business.

  • Tour operators: monthly revenues were 24% below their pre-pandemic benchmark in July 2021, equivalent to $3,000 less per business.

  • Theater producers: monthly revenues were 13% below their pre-pandemic benchmark in July 2021, equivalent to $1,000 less per business.   

Finance, real estate, and construction businesses still going strong

The finance, real estate, and construction industries have been highly resilient during the COVID-19 pandemic. When we first looked at COVID’s impact on small business revenues back in April 2021 (read the original report here), we found that annual revenues for finance and insurance business had gone up by 14% during the first 12 months of the pandemic — the largest increase of all. There was also clear evidence of an increase in demand for construction and home improvement projects. 

The latest monthly revenue data, from July 2021, tells a similar story.  

  • Investment advisors: 25% increase in monthly revenue compared to their pre-pandemic benchmark, equivalent to an extra $7,000 per business.

  • Mortgage bankers: 28% increase in monthly revenue compared to their pre-pandemic benchmark, equivalent to an extra $7,000 per business.

  • Title abstract companies (property records): 29% increase in monthly revenue compared to their pre-pandemic benchmark, equivalent to $11,000 per business.

  • Special trade contractors (e.g. home improvement): 14% increase in monthly revenue compared to their pre-pandemic benchmark, equivalent to $4,000 per business.   

Small businesses say the economy remains their No.1 threat

Despite signs of a more widespread economic recovery from COVID (see Recovery section), in the recent survey we commissioned1 almost 1 in 2 small businesses (49%) said the economy is still a potential risk. 

The top three threats they identified are:

  1. The economy (49% agree)

  2. Rising costs (40% agree)

  3. Low-price competitors (24% agree)

Rising costs cause cash flow problems and slower growth

Overall, almost three in five small businesses (58%) currently have a cash flow problem. They say this is limiting their ability to grow, take on new projects, and make capital investments. Some say it’s preventing them from hiring. 

The top three causes of cash flow problems today are:

  1. Low customer demand (27% agree)

  2. Costs rising too fast (26% agree)

  3. Unpaid invoices (9% agree) 

Low revenue businesses are under the most pressure. Almost a third (29%) of small businesses with less than $50,000 in annual revenue say cash flow is currently a major problem.  

Low cash reserves are another risk factor 

Almost three in five small businesses (57%) currently have less than six months of cash reserves. As with cash flow, the most vulnerable are again those with less than $50,000 in annual revenue. More than one of four of these businesses (26%) currently have less than one month of cash reserves to cover their costs in an emergency. 

Small businesses are embracing remote work 

The recent survey we commissioned1 reveals that almost half of small businesses (49%) now have remote workers. Of these, more than a third (36%) say the number will grow. Just one in ten (12%) predict a smaller remote workforce in future. Urban businesses that sell online are the most likely to have remote workers. Two-thirds (66%) of these businesses say they have a remote workforce compared to roughly a third (37%) of rural businesses.

Digital technology and accountants help small businesses to thrive

Almost four out of five small businesses (79%) agree they are more likely to succeed if they invest in digital technology. More than two in five (44%) want to make more use of digital technology in their business. 

Accountants also help small businesses to succeed. According to our survey respondents, the top three benefits accountants are bringing to their business are:

  1. Better business decisions

  2. Saving money

  3. More likely to survive

Most small businesses want to protect the environment

Almost nine out of 10 small businesses (86%) agree that environmental sustainability is important to the future of the economy. More than 2 in 5 (44%) say it is “critically important.” Millennials, urban businesses, and younger businesses (established less than two years ago) expressed the most support for sustainability. 

Two-thirds of small businesses (65%) want to minimize their environmental impact. More than 1 in 2 (52%) would do more if they had more help. 

7 overspending traps for small businesses to avoid

If you’re a small business owner, you know firsthand that every dollar counts.

The less you spend on activities that don’t directly impact your business, the more money you’ll be able to apply straight to your bottom line—and back into capital to help meet your business plan vision.

Those dollars could be invested in more equipment, inventory or marketing muscle, or they could equate to a larger paycheck for you to splurge on something exciting, like, you know, food.

But, you probably also have heard that you have to spend money to make money. So, how do you know which expenses will help the bottom line? We asked around and found seven categories where small business owners might be overspending and not even know it.

Take a look at your own financial statements to see how yours fare—and consider if some cutbacks or changes might help meet your financial goals.

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Managing payroll and its associated taxes can be costly, but that’s not the only expense that employees inflict—you also have to train and manage them.

That’s why it might be wise to use contractors for tasks that are traditionally handled in-house. For example, a live receptionist phone service can provide the personal touch you want to offer your clients, but without the cost of employing a full-time receptionist.

Another smart option for a wide variety of support services is using a virtual assistant, who can be hired on a per-task basis, or by the hour, to handle jobs that otherwise might clutter your plate.

Independent contractors are also a smart choice for specialized services. As experts in their particular field, they can execute on day one, and you can feel confident you are receiving the best possible assistance without paying a full-time specialty price. As an added bonus, they often can help your business by sharing best practices they can adapt from other clients. For example, a social media contractor will be adept at the latest SEO techniques, allowing you to take advantage of their expertise.

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We’re not even talking Netflix and its companions, although those expenses can add up fast—and, yes, most people vastly overspend on their entertainment consumption. But, business subscription can take the form of everything from media to software support services, and the costs can often sneak up on you.

While big companies might be able to justify numerous subscriptions because they are used by so many people, in the short-term they can be a cost killer for small businesses, especially since you might not be aware of how quickly they are adding up.

An audit can help shine a light on whether you are frivolously buying redundant or unused subscription services. Look at your credit card balance and financial statements to add up all your monthly obligations and determine if some cancellations, or even downgrades, to a free product, are in your future.

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Technology is constantly improving, and keeping up with it can be a never-ending game of chase. After all, a new model of tablet, laptop, smartphone or PC is constantly being released, loaded with features intended to change your world.

However, those expenses can be significant, not to mention the cost of productivity related to the learning curve that comes with each new iteration.

While you don’t want to skimp on technology that can help you do your job more professionally or effectively, you also rarely need the latest and greatest of anything—and certainly not of everything. Assess your needs and only upgrade if you can see a substantial benefit.

And, while you shouldn’t spend to excess on new technology, you also should be mindful of your expenditures on old technology. If you don’t use a landline, get rid of it. And, ruthlessly check for features on voicemail and other tech services that you’re paying for but don’t need.

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The ways to overspend on marketing are endless—and they vary depending on your business model and target market. In other words, what’s ineffective for someone else might be highly effective for you—whether it’s a custom website, pay-per-click ads, print ads, coupons or sponsored posts on social media—the list is endless.

The best way to avoid overspending on marketing is to get some good counsel from an all-around marketing source. Not a PR firm, which will recommend PR. Not an ad agency, which will suggest ads. Not a social media firm, which will sell you on the benefits of …you guessed it … ads.

Other marketing expenditures that can consume precious dollars include local sponsorships, where you make a donation in order to receive logo placement on banners or in programs. If the group or cause is one that you want to support, then this can be a smart use of funds. But, if you are hoping for visibility, you may be disappointed in how few people take notice.

Hone in on your target customer and make sure that every marketing expenditure is designed to reach them. Next, carefully track ROI for each activity to ensure that every marketing dollar spent is being used in the best possible fashion for your specific small business.

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Many entrepreneurs decided that their “brand” would be better served if they had a

luxurious office space with their name prominently displayed. But, many small businesses can function just as well out of a home office, and growing companies rarely need high-dollar space.

Consider whether clients routinely come to you and, if so, do they expect a fancy office space? Keep in mind that some might, especially if you’re in a particularly image-conscious field, while others might question whether your high billing rate is justified if it’s going to external trappings. Figure out the norms for your industry and follow along.

If office space is important, see if you can conserve elsewhere, whether it’s in size, amenities or location.

Another viable option might be coworking space, where you can use shared conference rooms, admin staff and other services. These also allow you to have a physical office address if that is important.

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Consider this the cousin of office space for retail companies. Of course, a physical store is often vital to your success, but if you are just starting out, you might consider if a virtual online store would help save money as you build your clientele.

A store can come with crippling overhead from rent, staff costs, inventory needs and more. And, the worst part is that you are often tied into long-term contracts that can be painful if the economy changes.

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The “yellow pages” are all but defunct, but there are many online services that have taken their place, and many of these “free” online business directories make their revenue by charging a monthly or annual upgrade fee for special perks, such as priority listing placement. Unless the directory is extremely well-trafficked and relevant to your business, paying to upgrade can be a costly waste.

This principle extends to buying databases or memberships in groups like professional trade associations or the local Chamber of Commerce. While these can be useful costs if you are making the most of them, take a hard look at every membership or directory fee to make sure that it’s pulling its weight, in terms of driving business or providing access to lucrative clients.

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In today’s world, it can be tempting to tap into all the streaming services, technology and marketing tools at your fingertips. But, overspending on “wants,” rather than “needs,” can be crippling to what matters the most—business survival, growth and longevity.

The bottom line is that small business owners need to watch every dollar in order to reach their long-term goals. Getting out of the overspending habit preserves your capital, bulks up your savings account and helps avoid incurring credit card debit.

This article was produced by the Quickbooks Resource Center and syndicated by MediaFeed.org.

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Small businesses are upbeat about growth and the economy

The survey we recently commissioned1 reveals that almost two-thirds of small businesses (65%) predict their business will grow this fall. Among businesses which sell online, this rises to 70%. But among businesses which do not currently sell online, this drops to 58%.

Similarly, three out of five (60%) small businesses are currently “somewhat” or “very” optimistic about the economy. But as we’ve seen elsewhere in this report (see Risks section), lower revenue businesses have different views. Those with less than $50,000 in annual revenue were far less optimistic than businesses with more than $1 million in annual revenue. Ecommerce businesses also expressed higher levels of optimism.

To boost growth, small businesses need more workers

Almost one in two small businesses (47%) need more workers. Many identify hiring as a top growth priority. One in ten (10%) want to significantly expand their workforce this fall. Urban businesses have the most appetite for hiring, with more than three out of five (58%) needing more workers right now.

Other growth priorities include:

  1. Improving marketing results (42% agree)

  2. Increasing online sales (42% agree)

  3. Developing new products/services (33% agree) 

Many will continue raising pay to address hiring challenges

As we’ve seen (see Hiring section), one in two small businesses (51%) are finding it harder to hire skilled workers and more than two in five (42%) are struggling to retain skilled workers. QuickBooks Payroll data2 confirms that many have already increased pay. Based on our recent survey, this trend looks set to continue: 

  • More than two in five small businesses (44%) are raising wages for new hires.

  • Almost 1 in 2 small businesses (48%) will use their next pay reviews to give more money to existing employees.

  • Two in five small businesses (40%) will offer existing employees larger bonuses in their next pay reviews.

Data sources 

1. Survey data

QuickBooks commissioned Qualtrics to survey 2,007 small business owners and decision makers throughout the U.S. in August 2021. Respondents’ businesses have up to 100 employees and more than $5,000 in annual revenue. Roughly a third (36%) are brick-and-mortar businesses. The remainder are omni-channel, multi-channel or primarily online. Around one in five (18%) are located in rural areas while the remainder are in urban or suburban locations. Percentages have been rounded to the nearest decimal place. Respondents received remuneration. 

2. QuickBooks Payroll data

This is not survey data but anonymized, aggregate data from 200,000 small businesses that use QuickBooks Online Payroll to manage their payroll. Businesses that have used QuickBooks Online Payroll for less than four months were excluded from the dataset. All hourly wages are expressed as median values. Contractors and salaried employees were excluded from hourly wage calculations. Contractors and salaried employees are included in average employee calculations.

Monthly workforce growth rates

Monthly workforce growth rates are calculated by comparing the average number of paid employees per business for the current month against the average number of paid employees per business for the previous month (e.g. August 2021 vs July 2021). For example, if the average number of employees goes up from 5 to 6 from one month to the next, the monthly increase is 20%. The data is not seasonally adjusted.

Pre-pandemic benchmarks

The pre-pandemic benchmarks used in this section of the report compare monthly payroll data during the pandemic against monthly payroll data from the corresponding month before the pandemic (e.g. July 2021 vs July 2019). 

Industry classifications

For this analysis, businesses were grouped using the North American Industry Classification System (NAICS), which has 20 categories. See the U.S. Census Bureau website for more information.

3. QuickBooks Online data

This is not survey data but anonymized, aggregate data from around 1 million small businesses that use QuickBooks to manage their business. The exact number of businesses in the overall sample fluctuates over time on a monthly basis from a low of 800,000 small businesses to a high of around 1.1 million because it excludes businesses that do not have corresponding monthly data year over year. The annual revenue analysis also excludes any businesses with less than 10 months of corresponding data available year over year. QuickBooks Online customers who have not connected their business bank accounts were also excluded from the analysis. Consequently, this report only includes businesses that had deposits in their accounts during the given timeframes. Median values are used throughout in place of mean (average) values to eliminate outliers that can skew the data.

Net bank deposits

The financial impact of COVID-19 is measured by comparing small businesses’ net bank deposits during the pandemic with the same data from the same businesses before the pandemic to reveal how things have changed for them year-over-year. Net bank deposits are incoming deposit transactions into small business bank accounts. This excludes non-operating deposits such as business loans and government assistance (for example, Paycheck Protection Program loans, also known as PPP). All of this data is anonymized and aggregated.

The net bank deposit data was used to calculate a monthly median year over year net deposit ratio (YOY revenue ratio) — referred to as “monthly revenue benchmarked to pre-pandemic monthly revenue” — which provides directional insights into small business revenues and recovery. The YOY revenue ratio is calculated as follows:

For each available business, calculate the YOY net deposit ratio by dividing the current month’s net deposit dollar amount by the corresponding month before the pandemic.

For each month, aggregate by taking the median YOY net deposit ratio among all available businesses for the relevant segment. For example, a YOY revenue ratio of 85% for a given month means that:

  • 50% of companies’ net deposits are less than 85% of the corresponding month before the pandemic.

  • 50% of companies’ net deposits are greater than 85% of the corresponding month before the pandemic.

  • YOY revenue ratio was then overlaid with industry and geographic data to reveal the patterns of small business recovery between April 1, 2020 and March 31, 2021.

Industry classifications

For this analysis, businesses were grouped using SIC (Standard Industrial Classification) categories, with 10 sectors (agriculture; construction; finance/insurance; manufacturing; mining; public administration; retail; services; transportation, communication, energy, & sanitary; and wholesale), comprising smaller industry categories (known as SIC2) and sub-industry categories (known as SIC4).

Annual revenue data

As described above (see “Net bank deposits”), annual revenues are estimated from anonymized, aggregate net bank deposit data. Annual revenues during the pandemic are benchmarked against the corresponding 12 months before the pandemic. In other words, annual revenue data from April 1, 2020 to March 31, 2021 is compared against annual revenue data from April 1, 2019 to March 31, 2020 from the same group of businesses.

Monthly revenue data

As described above (see “Net bank deposits”), monthly revenues are estimated from anonymized, aggregate net bank deposit data. Monthly business performance during the pandemic is then benchmarked against data from the corresponding months before the pandemic (for example, July 2021 vs. July 2019) from the same group of businesses.

Data limitations and considerations

The calculation of year-over-year revenue change required that any business included in the analysis have bank data for 2021, 2020, and the same months in the pre-pandemic years. Businesses were excluded if they had only recently connected bank data to QuickBooks or lost their bank connection within the one-year period.

A consideration of survival bias caused by businesses who discontinued operation or/and disconnected bank accounts during COVID-19 is also necessary. For example, the percentage of businesses that lost bank connections in 2020 (8%) is close to that in 2019 (7%), which means COVID-19 didn’t significantly increase the number of disconnected bank accounts in our data sample. Thus, the data is still comparable year-over-year without significant bias.

Net deposit data is only a proxy for business revenue and may sometimes over- or underestimate the true business revenues because this may include non-revenue deposits, such as equity or loan transfers from other bank accounts not linked to QuickBooks. The majority of these were identified and removed by a transaction tagging algorithm. Another potential limitation is that businesses may have only connected one of their business bank accounts in QuickBooks, which would only provide partial insights of their net deposit activity.


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This article originally appeared on the QuickBooks Resource Center and was syndicated by MediaFeed.org.

Small business money management mistakes (& how to avoid them)

In 2016, Wasp Barcode Technologies asked more than 1,100 small business owners what the biggest challenges were as it related to running their business.

Unsurprisingly, money management issues topped the list.

  • 43% mentioned that growing revenue was tough
  • 45% cited increasing profits as a primary challenge
  • 36% pointed their finger at cash flow management

Sound familiar?

That’s why today we’re looking at the top 13 money management mistakes small business owners make, along with some suggestions on how to solve them.

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“You need to spend money to make money.” It’s true investing in your business is necessary.

However, investing too much too soon is often cited as one of the top reasons for business failure.

In those fragile first years, it’s more important to focus on acquiring new customers and proving your business model works than it is to over invest in your endeavor.

How to solve this money management mistake

Much like over investing in a new hobby by buying gear just to lose interest in 3 months; many new business owners overspend, buying more equipment and tools than the business can sustain.

Unfortunately, this means starting with more debt and eroding your profit margins before the business has a chance to prove itself.

Before investing too much at once, scrutinize your business model and ask, “Am I creating a sustainable plan that’ll generate profit that can be reinvested over time?”

Start small to validate the business, and scale only when necessary and sustainable.

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It’s easy for a sense of optimism to replace practicality with positivity.

But conservative sales forecasting is necessary to determining reasonable growth and profitability.

A positive outlook is important, no doubt, but you also need to be realistic with your sales projections.

How to solve this money management mistake

Get a grasp on your cost per customer acquisition.

A formula you can follow is: X money spent on generating leads divided by sales made.

For example, if a company spends $500 on marketing in a year and acquired 100 customers, the cost per customer acquisition is $5.00.

It’s important to understand this metric, because if the formula holds true, you can better estimate your future sales by saying, “If I spend X more, I should get Y more customers.” This must be constantly monitored because the law of diminishing returns is inevitable.

Your historical data, repeat customer rate, and market trends should also be considered when predicting your future sales volume.

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82% of small business failures are due to poor cash flow management.

Understanding how much money is going in and out of the business seems like a simple concept, but it becomes complicated when you don’t have solid sales projections or when several clients doesn’t pay on time.

How to solve this money management mistake

Closely monitor your accounts payable and accounts receivableknow when a client isn’t going to payfollow up with late paying clients, cut costs where you can, and monitor your cash flow.

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Every business owner can relate to the pain of pricing their products or services.

There is an art and a science to pricing, which means you can’t rely on intuition or pull numbers out of a hat. Overprice and the customer may not buy, underprice and you wont turn a profit.

How to solve this money management mistake

You need to have a grasp on how others in your market are pricing their products in order to remain competitive.

For small retail and ecommerce businesses, this may be as simple as maintaining a spreadsheet of your competition’s inventory and prices. For larger organizations, a tool like Price2Spy will track pricing across the internet and notify you when prices drop or inventory is low.

Racing to the bottom on price is never a good idea. Look for other ways to stand apart from the competition, by striking a balance between price, value and a buying experience that makes you the best possible choice for your customer.

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One in five business owners use the same bank account for business and personal finances.

While it might not seem like a big deal to mingle those dollars, neglecting to keep your business and personal finances separate complicates your ability to track household bills, deductible business expenses, and revenue generated by the company.

How to solve this money management mistake

First, decide on whether you want to pay yourself a salary or draw.

Then, open a separate checking account for your business. A separate account comes with numerous benefits, such as the flexibility to connect different payment services (including debit and credit cards) to the business account, and a simplified bookkeeping process.

Setting boundaries forces you to view you and your business as separate entities which gives you a more accurate read on your businesses financial health.

This will come in handy later on if you ever audit your business, raise capital, or sell the equity.

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Here are two accounting terms you don’t want to confuse: profit and cash.

Believing that all cash is profit, paints an inaccurate picture of your business finances. This can lead to overinvestment in certain areas, while being unable to cover standard operational expenses.

How to solve this money management mistake

Cash is the amount of money your business has readily available at any given time, due to the influx and outflow of money.

Profit is what’s left after covering all necessary expenses.

When in doubt, keep in mind this basic calculation: Cash – Expenses = Profit

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One of the biggest perks of owning your own business is the ability to write off business expenses.

However, a surprising number of business owners overlook deductible expenses they’re entitled to.

One 2015 survey indicated that 21% of small business owners claim less than half of their small business expenses. Even more alarming, 10% said that they claimed “hardly any” or none of their expenses.

How to solve this money management mistake

This goes back to advice from earlier; open a separate business account.

A separate account will bring additional clarity around your accounts payable and business expenses during tax season, making it easier to write off the appropriate expenses.

Create a system for keeping receipts. Some tools simplify expense tracking by allowing you to attach a picture of your receipts to the corresponding transaction.

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Intentionally or not, many business owners forget to pay their estimated quarterly taxes.

Neglecting to do so can wreck your financial projections, saddle you with penalties and fees, and further complicates filing taxes at the end of the year.

How to solve this money management mistake

Calculate and pay your quarterly taxes.

Paying your taxes quarterly helps set manageable tax savings targets, and minimizes the temptation to tap into a tax savings account.

Plus, by staying on top of your quarterly taxes, you minimizing the risk of losing deductions along the way, helping you stay on top of your overall cash flow.

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We’ve discussed the dangers of overspending early in you business life cycle. That doesn’t mean that you shouldn’t invest money back into your operation. Reinvesting funds will be key to your growth and success.

It’s wise to commit some dollars to improvement for your business—whether that’s additional employees, new equipment, or whatever else you need to keep your business moving forward.

How to solve this money management mistake

Determine what percentage of your profits you’ll set aside every month to re-invest in your business.

Set benchmarks and savings goals to start investing in new tools, equipment, marketing… or anything else that helps you reach the next milestone.

To make this even easier, set up a separate savings account with an automatic transfer of that percentage every day, week, or month depending on how often you get paid.

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Not only does shorting yourself have a negative impact on your personal finances, it also gives you an unrealistic understanding of your profitability.

Obviously, your company will appear more successful on paper if you aren’t paying yourself a reasonable salary.

The problem is, underpaying yourself warps your perspective on your business finances, and undermines your ability to improve your quality of life.

How to solve this money management mistake

How much money do you want to make?

Pay yourself first, then cover the expenses. According to this article on Entrepreneur.com, after your salary and expenses, you should also pay yourself an additional 3 to 4 cents for every dollar your business earns.

This may seem uncomfortable at first, it’s important to remember that your business is supposed to pay you a living wage. If it isn’t currently, you need to figure out why and adjust your models accordingly.

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Predictability is the dream for most business owners, but that can be hard to come by in the world of entrepreneurship. With so many ups and downs, many business owners take more of a “fly by the seat of your pants” approach to money management.

A budget is the financial road map for your month, quarter and year. Without a clear understanding of your financial responsibilities you may end up making a wrong turn into a financial pitfall. A detailed budget is the best tool for understanding the destination of every dollar.

How to solve this money management mistake

Dissect a dollar.

For every dollar you make, know where every penny is going, Each dollar coming into your business needs to be accounted for. Determine ahead of time what needs to be set aside for accounts payable, savings and taxes. A clear budget will help you understand your profits and let you know when cuts need to be made to avoid losses.

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The world of business ownership can be fickle. Which is why you need a safety net. Yet, far too many business owners neglect to build a financial buffer for themselves.

Having a reserve will help you address any unexpected expenses, while also giving you the peace of mind that you aren’t running your business so close to the bone.

How to solve this money management mistake

This goes back to the previous advice of budgeting and dissecting a dollar. You should also consider what to do when you come into unaccounted for cash.

Whether it comes from beating your sales targets, increasing profit margins or reducing operational cost. You should have a plan for saving a percentage of this unbudgeted money.

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Here’s a rude awakening: One third of entrepreneurs don’t have a retirement savings plan. Many blame insufficient income for the lack of a nest egg.

Not planning for your own financial future inevitably leads to the realization that you will either work forever or be forced to sell everything you have worked for.

How to solve this money management mistake

When mapping out your budget, make sure you have a plan in place to set aside funds for retirement.

If you’re self-employed without employees, you may choose to contribute to an Individual 401(k), Traditional or Roth IRA, or SEP IRA. With or without employees you should consult a financial advisor to determine what plans best me your long term goals and those of your company.

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There are plenty of challenges that come along with business ownership, and managing your finances is definitely one of them. That makes it easy to fall victim to many of the common money pitfalls we outlined above.

Fortunately, awareness is the first step to effectively overseeing your business finances. Keep an eye out for these frequent traps, and you’re far less likely to become another statistic.

This article was produced by the QuickBooks Resource Center and syndicated by MediaFeed.org.

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