7 Common Financial Mistakes and How to Avoid Them
I could sit and list things that I've done wrong as an owner running my own business all-day-long. If you've run a business for more than 5 minutes you've made a financial mistake. It happens. We're all human and money isn't an easy topic for most business owners.
Here's 7 common financial mistakes that I've seen as a CFO and some even made myself that when solved or avoided can create quick wins and more net income / EBITDA or whatever number you use to define profit 🙂 (check out our other blog on Profitability: Profitability Isn’t Real)
1. Not setting the right payment terms
2. Not having a cash management plan
3. Not paying yourself as the business owner
4. Not understanding the ROI of taking on debt
5. Asking for money for the wrong reasons
6. Not having the right insurance in place to cover your risk
7. Simply not paying attention
1. Not setting up the right payment terms
This is far too common for new business owners. They go out, launch a product or service and then get a few bad clients that don't pay, pay late, or ask for refunds and they are at a huge loss for cash.
One way to avoid this is to have GOOD payment terms and refund policies in place. There are things you can't control - like if someone doesn't ever pay- but having something in writing at the time of service or product delivery sets expectations to the customer.
For Service based business I recommend some amount of upfront payment for project fees, a recurring auto debit if you're charging on a regular basis or on a retainer, voiding contracts if the 1st payment isn't received in 7 days, and implementing late fees. Additionally, you do want to have a clause on what happens if the client thinks they deserve a refund, but I'll leave that up to the lawyers on what that could look like.
Even with that, you will end up with people that don't pay, pay late, or ask for refunds - but everyone who has implemented at least a few of these has much better success in getting paid.
2. Not having a cash management plan
Everyone loves to talk about “cash flow, cash flow, cash flow” and so do I, but the other side of that is what to do with the cash when it's flowing. Cash management is much broader than just making sure cash is coming in before it goes out. You need to build cash reserves and for all the right things.
There's 3 buckets of cash reserves that every business should have:
Taxes - that's not your money, don't spend it!
"OH-Shit Money" - this is your emergency fund. The amount for every business is different, but at a minimum try to have 3 months of expenses
Future investments - this is for the long term strategy side of the business - what do you want to do in 1, 3, 5 years that you might need a chunk of cash for? (this is the MOST ignored cash strategy that business owners are missing out on.)
The other area of cash management is having the right place to put your money. A quick tip that could get you a few extra $$$ - open a high-yield business savings account! That's the highest business savings account I've seen yet.
If you're managing over $1M of cash - then find a good banker to help you keep those buckets in all the right places and get you higher rates on your business savings accounts. Reach out if you need a recommendation - I know a few
3. Not paying yourself as the business owner
This is one of my favorite topics to discuss with business owners because it's so often overlooked. I've met countless business owners who are running successful companies but aren't taking home a reasonable salary.
Remember: your personal needs and wants MUST be your business NEEDS.
If you NEED to make $10K per month, then at minimum your business needs to be able to pay you that amount. You need to figure out how much revenue your business needs to make to pay you that amount.
When you underpay yourself, you're not only doing yourself a disservice, but you're also skewing your financial statements. This becomes especially problematic if you ever want to sell your business - buyers want to see what the true cost of running the business is, including fair market compensation for the owner.
I recommend using the Profit First table as a starting point to determine what percentage of your net revenue should go to owner compensation based on your business size. Then compare that to what your personal needs and wants are to understand what you need to do to either increase your income or bring it back down to keep the business healthy.
4. Not understanding the ROI of taking on debt
Debt isn't inherently bad - but taking on debt without a clear understanding of the return on investment is a recipe for disaster. I've seen too many business owners take out loans or max out credit cards without a solid plan for how that money will generate more revenue.
Here's my rule of thumb: debt must have an ROI. Period.
Before taking on any debt, ask yourself:
What specific revenue-generating activity will this money fund?
How long will it take to see returns?
What's the expected ROI compared to the cost of the debt?
What's my backup plan if the expected returns don't materialize?
Remember, debt is a tool - it can either build your business or break it, depending on how you use it. The businesses that use debt strategically to accelerate growth that's already working tend to thrive, while those using debt as a Band-Aid for cash flow problems tend to spiral.
5. Asking for money for the wrong reasons
This applies to both debt and equity financing. I've worked with venture-backed startups and bootstrapped businesses alike, and I've seen both make the mistake of seeking funding for the wrong reasons.
The right reasons to seek funding include:
Accelerating growth of something that's already working
Scaling a proven business model
Making strategic investments with clear ROI
The wrong reasons include:
Covering ongoing operational losses
Funding an unproven business model
Paying yourself more without increasing business value
Because everyone else is raising money
Before you seek funding, get crystal clear on exactly how the money will be used and how it will generate returns. Investors and lenders want to see that their money will be used to create more value, not just keep the lights on.
6. Not having the right insurance in place to cover your risk
This is one of those "boring but essential" aspects of business finance that too many owners neglect until it's too late. I've seen businesses devastated by unexpected events that proper insurance would have covered.
At minimum, most businesses should consider:
General liability insurance
Professional liability/E&O insurance
Property insurance
Business interruption insurance
Cyber liability insurance (increasingly important)
Key person insurance
The specific types and amounts of coverage you need will vary based on your industry, size, and risk profile. But skimping on insurance to save a few dollars per month can lead to catastrophic losses down the road.
I met a business owner whose factory burned down and their insurance didn't cover the damage. By the time they reached out for help, they were on the verge of bankruptcy. Don't let this happen to you - review your insurance coverage annually with a qualified broker who understands your industry.
7. Simply not paying attention
This might seem obvious, but it's probably the most common mistake I see. Many business owners are so focused on delivering their product or service that they neglect to regularly review their financials.
Here's what I recommend:
Schedule a monthly financial review meeting with yourself (or your team)
Review key metrics like revenue, expenses, cash flow, and profit margins
Compare actual results to your budget or forecast
Identify any concerning trends early
Make adjustments before small issues become big problems
The businesses that thrive financially aren't necessarily the ones with the fanciest accounting systems or the most complex financial strategies. They're the ones where the owners consistently pay attention to the numbers and make informed decisions based on what they see.
The Bottom Line
Financial mistakes happen to everyone - even CFOs like me! The key is to learn from them, implement systems to prevent them from recurring, and stay vigilant about your business finances.
If you're struggling with any of these areas, you're not alone. Consider joining our Finance Fight Club membership where we provide accountability, templates, and CFO guidance to help you avoid these common pitfalls and build a financially healthy business.
Remember, financial confidence isn't about knowing everything - it's about knowing enough to make good decisions for your business and knowing when to ask for help.
