You might hit home runs with personal finance, but as soon as you take a swing at business ownership, you have entered a completely different ball game. Not all finance is equal, and if you try to run your business the way you run your household, you aren’t likely to see many points on your scoreboard.
Even if you don’t use your personal finance lessons to run your business, you are likely to make a few money mistakes in your first years as a business owner. Fortunately, by reading about the following common errors, you can adjust your business stance to avoid them.
Overspending at the Start
You need to spend money to make money — but that doesn’t give you the authority to indulge in impulse spending. In the first few months of operation, you need to be able to differentiate between expenditures that will pay you back in the future and costs that only eat away at your initial capital. This requires a finely-honed, cost-benefit analysis process as well as a tailored budget to keep your spending on track. Speaking of, another mistake to avoid is…
Underrating Cash Flow Statements
You need to be able to track every cent that comes into your business and every cent that goes out. Cash flow statements expose your revenue and your expenses, so you can better understand how money moves through your business. With this knowledge, you can make more appropriate budgets during the times of plenty; then, you will be more likely to survive the times of scarcity. Without cash flow statements, you are basically guessing about the money you have, which introduces risk you don’t need.
Overestimating Future Sales
Let me guess: You’re an optimist. Most successful entrepreneurs tend to focus on the positives, which is exceedingly useful in a career paved with risk. However, this tendency is also dangerous, especially when considering cash flow. Realism is essential for calculating your future sales; you must use objective revenue forecasting methods to predict sales with any accuracy. When you can be relatively certain of your future sales, you can be more confident that your spending won’t topple your business.
Overlooking Past-Due Receivables
Your business depends on your clients paying up. If you let delinquent clients go, you are telling future clients that you’re willing to do work for free. Unfortunately, chasing delinquent clients is expensive and time-consuming. Instead of doing it yourself, you can get the money you deserve with less fuss by selling your unpaid invoices to a factoring company. Invoice factoring is a small business financing option available to most businesses, but it is most affordable for B2Bs and B2Gs. However, even if you factor, you should also develop strict payment terms and penalties to keep your clients in line.
Underfilling Cash Reserves
No matter how well you prepare, you will always experience financial hiccups. Maybe your warehouse catches on fire; maybe your vendors go bankrupt; maybe a competitor emerges to undercut your prices and steal your clients. To survive turbulent times, you need to have cash to spend, which means you need to save up a cash cushion. While it might seem more prudent to reinvest whatever cash you make, putting some in a savings account could prevent you from instant disaster.
It might seem like a good idea to put all the money you have in the products you sell, but in truth, this is one of the most dangerous money mistakes you can make when your business is young. If you don’t make sales fast, you won’t have any cash to keep your business afloat; plus, you’ll have to pay for the space to store your unsold inventory. Instead, you should stock up slowly and in-line with your projected sales.
Overvaluing Fast Growth
Growth is good — except when it isn’t. You shouldn’t force your startup to grow too fast, or you might have end up with more resources than you can pay for. For example, it is rather common for small businesses to find large office spaces in anticipation of large workforces, only to waste money on high rents for no purpose. When it is time to grow, you’ll know, and you can find special financing options for that purpose. Until then, you should stick to your budgets and keep your cash flow healthy.