Business owners and managers need to be very mindful of their finances. It’s important not just to be able to sustain the business through slowdowns or meet unexpected expenses, but also to be mindful of those stakeholders (employees, owners, vendors, etc.) who depend on the business to support them. If poor decisions are made in a business that cause the company to become unable to meet its obligations, many people can be negatively impacted.
Keeping a company out of “the red” requires good decision-making ability coupled with regular reviews of personal and company finances and conservative planning. Owner-operators must also rely on good forethought after an honest appraisal of the company’s outlook. Here are a few business mistakes to avoid that will help you to keep your finances in the black.
- Trying to be financially independent too soon. Many people who start small businesses initially still have full-time employment while they work on their own companies during evenings and weekends. Eventually, most people hope to leave their jobs to work full-time in their own companies, but it can be a major misstep to walk away from an income before your company can support you. Gaps or delays in revenue aren’t rare, nor are false starts in cash flow for a new business. Before you leave a job with a regular paycheck, make sure that your business has strong, dependable cash flow.
- Trying to grow too quickly. This can include hiring people before you should or investing in expensive equipment or software, just to name a few. Many owners or managers of young business have ambitions that can lead to excessive optimism. Just because a business had enough revenue for a week or two that could pay for another worker, that doesn’t mean that someone should be hired. Grow slowly. Cautious optimism is the key to long-term, sustainable growth in business. Always make sure that your business could sustain itself even if revenue suddenly fell or had unexpected delays. Also recognize that unanticipated expenses do come up, which you need to be ready to cover.
- Overspending. Taking office space to soon, or obligating your company to meet future expenses that you aren’t yet 100% certain you can support, can be extremely detrimental to your company. Quite simply, make sure that you don’t spend more than you can afford. If you lost your biggest customer tomorrow, would you regret taking on any of your expenses? If you might regret them later, go ahead and cut them from your budget now.
- Not paying proper taxes or fees. Most business need to have licenses of one kind or another, which often have fees attached. Businesses are also typically required to pay a variety of different taxes. Failing to have the proper licenses or pay the proper taxes can cause you to suddenly encounter massive bills to pay fees or taxes that have accrued, plus interest or penalties. To avoid any surprises that could suddenly push your company’s finances into the red, make sure you keep up with all taxes and fees.
- Failure to seek or follow proper advice. The areas representing the largest risk to a business are often legal and accounting, in part for reasons like those discussed in Mistake #4. Law and accounting are complex fields that can require technical guidance from competent advisors. Hiring an incompetent attorney or failing to implement the proper accounting systems can lead to substantial problems down the road. These are two areas that should not be ignored.
- Borrowing. Taking out a business loan or even just borrowing from friends or family can be very tempting, especially in a new business that is just getting going. The profit potential of a new business can seem extraordinary, and the early stages of starting a new company are often very exciting. If you really want to make sure that your company doesn’t go into the red financially, you’ll resist the urge to borrow. Not only do most loans have origination fees and other underwriting costs (in addition to legal costs to have loan documents professionally reviewed), but most loans also require regular payments for debt service. Even in cases where regular payments aren’t required, the interest charged on borrowed money can add up very quickly. If you’re in a position where you feel the need to borrow for your business to survive, you need to rethink the long-term viability of your business.
The finances of any small business are surprisingly routine. Businesses, just liked individuals, need well-thought financial plans to help guide their growth and development, but the rules for keeping a business out of trouble are relatively easy to follow if you commit yourself to following these basic principles.
Sarah Porter is a money-savvy writer and mum of two based in Manchester, UK. She is the Brand and Marketing Manager at the UK loan website Oink Money (oinkmoney.com), as well as the founder of a well-known money-saving website. Sarah is originally from Edinburgh where she studied Business and later worked in finance for a FTSE 100 company. She left her career in finance to pursue her passion for writing, a move which allowed her to travel the world with her laptop while running her blog.
Sarah has been writing about money, debt and marketing for the last 6 years and has contributed to a number of prominent finance and marketing blogs with many of her market-leading money saving tips. When she’s not working, she enjoys skiing, traveling and days out with the kids.