These Financial Mistakes can bring your business to a standstill but are easy to avoid.
One thing you will feel as a small business owner for a lifetime is that there are no plans for success. That is certainly true. The experience of owning a company and the success as such are unique from company to company. Financial Mistakes always occurs in the success of any business. Try to avoid them as soon as you can.
With that in mind, there are some things that are generally true. Some mistakes can affect companies in all industries, regardless of their industry or the experience of an entrepreneur. The following Five financial mistakes that small business owners put at risk for their businesses. Avoid sealing the solvent and start to thrive.
1. Don’t check your corporate credit rating.
Hope you know by now that you have a corporate credit score. It is an entirely different number than your personal credit rating that tells the story of your debit history. Many of the factors that affect this number – payment history, debt utilization, length of history – are things you have a lot of control over.
As your business grows, that number becomes immensely important. It will not only help you secure corporate finance in the future, it will also be a public record. If another company is considering extending corporate loans and the corporate loan value is low, it may refuse to extend the net terms or offer less favorable terms.
Factors such as the payment history of your company credit card can help you increase your score. Keeping an eye on this number and checking it regularly is key to keeping your company in the best possible position.
2. Wait too long to apply for funding (or take too long).
As we talk about small business funding, we mention the mistake of waiting until you are in the middle of an emergency before applying for a small business loan.
Corporate finance has many uses: you can use the money to take advantage of an opportunity to close a cash flow gap, increase working capital, or, of course, help in an emergency. The last part is the most complicated situation. Of course, you never know when the catastrophe will happen. With this in mind, many entrepreneurs wait until the last minute to apply for funding. This generally makes loans more expensive with higher interest rates and shorter repayment periods, which can put enormous financial pressure on entrepreneurs who are already in serious trouble.
Just because you can get a loan doesn’t mean you should. Corporate finance is not free: commissions and costs are associated with each loan applied for. Therefore, it is important that you absolutely need the money before signing on this dotted line.
An alternative is to have a commercial credit card or line of credit ready so that you have no problem asking a question when accessing funds. You also only pay interest on the money you actually use.
3. Do not monitor cash flow carefully.
That takes us straight to the next point. Cash flow is one of the most reliable indicators of a company’s health. You get an idea of your short-term survival and can use the cash flow forecasts to see whether you are able to meet your fixed cost obligations, for example.
Entrepreneurs who are not in the savannah with their finances every day are at a disadvantage. It’s like saying, “Well, I’m alive. I don’t have to know if I’m healthy, do I?” What would you never do, Of course, you can leave the essential documents to your accountant, but it is a big mistake not to understand whether your company has negative cash flow or whether it is dangerously close.
Understanding cash flow has a significant impact on many other elements of your company. It is a big financial mistake not to know how to read the income statement and balance sheet that are directly related to cash flow.
4. Postpone investments in marketing, sales, and research.
It is very easy to believe that marketing is secondary. If you build it, it will come, right? Absolutely not.
Many small business owners make the mistake of no longer investing in marketing and sales but assume that a good product will sell itself if they build it. Although you may have a very sticky product when people get involved, it is wrong to assume that people will find it naturally. You need to know where they are and invest in finding customers.
Do not take anything with you: the assumptions you make about the wishes and habits of your consumer base may not be true. Confirm. He didn’t quit his daily job just to develop an interesting product or service that only his friends and family knew about.
Do some homework to make marketing useful. Talk to other entrepreneurs and find out which campaigns can help you get the best marketing ROI. The world exists far beyond Facebook ads: explore your options and choose the path that is likely to reach the customers you want.
5. Ignore the sunk cost error.
You will make mistakes. (But not this one, right?) The best thing you can do is understand that as a small business owner, you’re spending some time and money on ideas that just don’t work. However, losses must be reduced.
This is the idea behind the submerged cost error, an idea that we have to pursue because we have invested so much in something, even if it doesn’t work. It is the principle why a player who is down staying at the table thinking that he is getting his money back, or why an investor is holding his money in a declining proportion and waiting for his return.
Maybe try a new product or offer a new service. You spent a lot of time and money developing it, but it doesn’t gain traction. Instead of spending more money to make it work (if it still doesn’t work), read the signs and continue. In the end, you will save yourself a lot of frustration and problems and avoid one big mistake that gets many entrepreneurs out of business.
As your business grows, you will learn a lot of lessons. And one way to learn is from your mistakes. So much the better if you can avoid mistakes, especially bigger ones. Knowledge of these five common but catastrophic financial threats.
A. You do not have separated corporate and private accounts
There are no links in this topic. Even if you work alone as a solo preneur or freelancer, you cannot afford to save money to keep your finances separate. You will pay the price later, I learned this lesson myself.
Ignore the convenience requirement and commit to creating separate savings accounts, checking accounts, and credit cards for your business before collecting revenue from paying customers. If you do this in the beginning, it will be much easier for you to keep your business accounts, plan quarterly tax estimates (US) and budget for the unpredictable months ahead.
Separate bank and credit accounts also give you a more accurate picture of your company’s financial situation by avoiding the overlap between what you personally earn and spend and what the company generates and costs each month. The IRS also applies very strict rules against the inappropriate personal use of company funds, and you can easily get into a tax gap if you are not careful.
Having a separate business and checking account will better protect you from damage to your credit rating if your business breaks down in the future.
More importantly, separating your business and personal accounts promotes a completely different psychological way of thinking about how your business affects your life. Every dollar your company earns shouldn’t go straight to you if you invest in growing your company and building a stronger future for yourself. If you have separate accounts, you can prevent these lines from blurring.
Other expenses like imaginative parties, teamwork trips, and frivolous electronics that are not essential to the growth of your business offer little profit. If you can’t afford a paid subscription to a popular CRM platform, choose a free or cheaper alternative. Do with the bare minimum. If the hiring of regular employees is not available, look for talented freelancers on platforms such as LinkedIn ProFinder or Upwork. First, increase your business and collect more available liquidity before spending on “essential” items.
B. Make great personal purchases
Even if you have separated your personal and business accounts, there are often scenarios in which you are forced to use your personal funds to finance a business need, e.g. For example, expansion into a new niche or a marketing campaign that promises high performance. for the company. .
Many unknown variables and unexpected learning opportunities will occur during the first year of activity. The reality is that you will encounter obstacles. There will be shortcomings and some of them can be expensive.
If you’re in a hurry to buy a car, house, or other important personal expenses, and your business has something unexpected, it means you won’t be able to pay next month. It cannot be tied to an exorbitant amount of personal expenses. Be as lean as possible in both your business and personal life as you grow your new business.
C. Debt with credit cards with the expectation of future earnings
The best advice to never count eggs before hatching is eternal financial wisdom.
The same applies to caution with credit cards. Handling credit cards responsibly is normal business practice, but it also puts you at high debt risk if you manage your new line of credit poorly.
Because credit cards are so convenient to use, many new business owners don’t notice that they make spending difficult and charge interest on each use, use their credit line, and don’t pay the full balance. every month
The irresponsible use of credit cards is seen by many experts as the worst financial mistake entrepreneurs make. If you’re looking for convenience, use a debit card.
D. Don’t save for difficult times and emergencies
From Benjamin Franklin to today’s finest financial experts, there’s no shortage of people telling you that they save a lot of money on unexpected expenses.
Let’s call it savings for a rainy day, but there will be times when something happens and covering the cost with your credit card is a short-sighted solution that tends to cause more problems in the future. Most financial planners advise entrepreneurs to spend at least three months in an emergency or emergency fund on their business and personal expenses.
E. No upcoming tax obligations are planned
Different types of companies have different federal and state tax obligations, so governments can fund infrastructure and programs that benefit citizens.
However, when you were a full-time worker before starting your own business. Your employer gave you your income taxes each year. When it was time to use an easy-to-decipher W2 form. Now that he is self-employed, he is responsible for taking the initiative and paying his tax obligations alone all year round.
As an individual or autonomous company. It is necessary to make estimated quarterly payments to the IRS. So that you don’t have to pay a large tax bill in April each year. And the exact calculation takes a little time and effort. Plan accordingly as this is only part of your business.
Do not set a clear budget for your company
If the worst worsens, you may be able to run your business without a clear plan for the future, but you’ll struggle to make it without at least a rough budget to determine what you can and can’t spend on each business Month.
As a founder and manager, your job is to drive your new business towards profitability. This is only possible if you have a carefully planned budget for operating, marketing and other expenses. A clear budget increases financial discipline and clarifies the road map for company growth.
Master your money…While a single drastic financial decision can cause a company to fail, bankruptcy often follows a series of wrong decisions and financial mistakes. You can avoid these mistakes by paying more attention to the details of your personal and business cash flow throughout the year.
Losing money is much easier than making money.
Plan your budget, monitor your expenses, save for emergencies, keep the boundaries between companies and employees, and always think about spending as it will generate future revenue for the company.