5 Expensive Blunders to Avoid in Your Small Business Finances

Building a business isn't easy, and few of us get it right all the time. The best we can do is try to learn from others and avoid their mistakes. Here are a few common financial mistakes small business owners tend to make.

1. Not tracking business expenses

There are two important reasons you need to keep track of your business expenses. The first is simply knowing where your money is going. It's impossible to properly plan for your expenses without knowing what they actually are.

You'll also need to keep track of business expenses for tax purposes. There are a ton of business-related expenses that can be deducted from your federal and state taxes.

It may be tempting to base your deductions on estimates, especially if there are a lot of eligible transactions. But if you happen to be audited, you could be in a lot of trouble if you can't substantiate each claim with appropriate documentation, like receipts.

A lot of accounting software programs will let you track expenses. Many will even let you connect a credit card and bank account so you can import expenses automatically. Of course, you can also stick with the old-school tried-and-true method of color-coded spreadsheets. (Or, like me, you can do both!)

2. Skipping your estimated tax payments

Federal and state governments expect you to pay taxes on your income as you earn it. For regular employees, taxes are paid every paycheck through regular withholding.

Even if you don't receive an employer-provided paycheck, however, you're still expected to pay taxes on your income throughout the year. As a small business owner, you do this by making quarterly estimated tax payments.

Quarterly payments are due four times a year:

• April 15: Estimated tax payment for January through March
• June 15: Estimated tax payment for April and May
• Sept. 15: Estimated tax payment for June through August
• Jan. 15: Estimated tax payment for September through December

Failing to pay your estimated taxes on time can result in penalties when you finally file your annual taxes. The amount of the penalty can vary, but they can be quite severe if you underpay by a significant amount.

3. Having no business emergency savings

I recommend to everyone to keep at least a few months' worth of expenses saved up in an emergency fund. This fund can get you through lean times or, well, emergencies.

Your business also needs a dedicated emergency fund. It should include at least a few months' worth of expenses -- and yes, this includes payroll to cover any employees who depend on your business for their livelihoods.

Tuck your business emergency fund into a high-yield savings account, where it can grow while it's not in use.

Credit cards as "emergency funds"

I've heard from many folks, including business owners, who claim they don't need an emergency fund because they can just charge stuff to their credit cards. Well, folks, those credit cards still need to be paid off.

Unless you have a 0% APR offer on that card, it will start accruing interest at an alarming rate. Letting that interest grow untamed because you don't have an energy fund on hand to cover the balance can create its own emergency.

Don't get me wrong, I think most business owners should have a small business credit card. They can earn valuable rewards, and they offer a reliable payment method for businesses with sporadic cash flow. Just don't fall into the trap of thinking you can charge away your money problems. It doesn't work like that.

4. Being too laid back about unpaid invoices

As a bit of an introvert, I definitely learn toward the "avoid conflict" side of things. But there's a fine line between being non-confrontational and being a doormat. And it gets worse when you're a small business owner whose income relies on strangers paying you on time.

One study by Entrepreneur found that the average small business has $84,000 in unpaid invoices, for a total of around $825 billion. With so many of us living contract-to-contract, even one unpaid invoice could be the difference.

Stand up for your services. Be polite but firm about payments. Make sure you keep track of who owes you what -- and follow up on folks who are slow to pay. Often, persistence can be enough to get clients to make good. If that fails, however, you may need to hire an attorney to send a letter, or perhaps even consider filing in small claims court.

5. Letting personal and business finances mingle

The smaller your business, the more the lines between personal and business expenses can get blurry, especially if you work from home. Unfortunately, this financial mishmash can be a huge pain in the neck when it comes to tracking business expenses -- and, worse, filing taxes (it's easy to miss a valuable deduction if it's lost in the financial shuffle).

That's not to say I never put a business expense on a personal card to maximize my rewards. But the only reason I can get away with it is that I always carefully log business purchases in my accounting software (including noting the card used to pay so I can look it up if needed in the future). I also have a dedicated business checking account that pays for those charges, regardless of which card I use.

Running a business is a complicated business, and we all make mistakes. Ideally, these tips help you avoid some common financial mistakes -- so you can make some new mistakes of your very own!