Success in the business world requires consistent planning. Not just in terms of having business documents, but even with financing your business. Whether it is a for-profit or nonprofit, businesses need financing every now and then to sustain operations and conquer markets.
Consider things like electricity, water, office crockery and stationery and many other things including additional infrastructure. They all require money. As it is, you require money to make money in business. But this is easier said than done.
Avoiding the top 7 business financing mistakes is a key component in business survival. If you start committing these business financing mistakes too often, you will greatly reduce any chance you have for longer term business success. The key is to understand the causes and significance of each so that you’re in a position to make better decisions.
1. No Monthly Bookkeeping
Regardless of the size of your business, inaccurate record keeping creates all sorts of issues relating to cash flow, planning, and business decision making. This is especially true for startups. They just go through day-to-day business without a thought of keeping a record of their transactions.
We’re looking at purchases, sales, liabilities, salaries etc., that happen during business operations. Once a bookkeeping process gets established, the cost usually goes down or becomes more cost effective as there is no wasted effort in recording all the business activity.
Without clearly articulated records, it is almost impossible to track business progress or health. If this happens over a prolonged period, the result is business failure and/or closure, almost always. By itself, this one mistake tends to lead to all the others in one way or another and should be avoided at all costs.
2. No Projected Cash Flow
No meaningful bookkeeping creates a lack of knowing where you’ve been. No projected cash flow creates a lack of knowing where you’re going.
It is very important to begin each month with clearly defined goals. Plan on how much is expected to come in and how much is to be spent. Without keeping score, businesses tend to stray further and further away from their targets and wait for a crisis that forces a change in monthly spending habits.
Even if you have a projected cash flow, it needs to be realistic. A certain level of conservatism needs to be present, or it will become meaningless in very short order.
3. Inadequate Working Capital
No amount of record keeping will help you if you don’t have enough working capital to properly operate the business. Capital is foundational.
That’s why its important to accurately create a cash flow forecast before you even start up, acquire, or expand a business. Too often the working capital component is completely ignored with the primary focus going towards capital asset investments.
When this happens, the cash flow crunch is usually felt quickly as there is insufficient funds to properly manage through the normal sales cycle. . In essence, we’re looking at cash reserves. The cash that will be spent as need arises.
4. Poor Payment Management
Unless you have meaningful working capital, forecasting, and bookkeeping in place, you’re likely going to have cash management problems.
The result is the need to stretch out and defer payments that have come due. The result is stress on the business’s financial muscle. This can be the very edge of the slippery slope.
I mean, if you don’t find out what’s causing the cash flow problem in the first place, stretching out payments may only help you dig a deeper hole.
5. Poor Credit Management
There can be severe credit consequences to deferring payments for both short periods of time and indefinite periods of time.
First, late payments are probably the most common ways in which both businesses and individuals destroy their credit.
If you put off a payment too long, a creditor could file a judgement against you further damaging your credit. This is particularly true if the suppliers, who feel betrayed by the business, can involve courts in seeking out their payment.
If you do get into situations where you’re short cash for a finite period of time, make sure you proactively discuss the situation with your creditors and negotiate repayment arrangements that you can both live with and that won’t jeopardize your credit.
6. No Recorded Profitability
In order to ensure that the business is in health and also source motivation, it is imperative that successes are put in black and white. This will help in monitoring productivity and efficiency
For startups, the most important thing you can do from a financing point of view is get profitable as fast as possible. For existing businesses, historical results need to show profitability to acquire additional capital.
In many cases, businesses work with their accountants to reduce business tax as much as possible but also destroy or restrict their ability to borrow in the process when the business net income is insufficient to service any additional debt.
7. No Financing Strategy
A proper financing strategy creates 1) the financing required to support the present and future cash flows of the business, 2) the debt repayment schedule that the cash flow can service, and 3) the contingency funding necessary to address unplanned or unique business needs.
This sounds good in principle, but does not tend to be well practiced. Why? Because financing is largely an unplanned and after the fact event. It seems once everything else is figured out, then a business will try to locate financing.
There are many reasons for this including: entrepreneurs are more marketing oriented, people believe financing is easy to secure when they need it, the short term impact of putting off financial issues are not as immediate as other things, and so on.
Regardless of the reason, the lack of a workable financing strategy is indeed a mistake. However, a meaningful financing strategy is not likely to exist if one or more of the other 6 mistakes are present.
This reinforces the point that all mistakes listed are intertwined and when more than one is made, the effect of the negative result can become compounded.