Common Financial Mistakes Small Businesses Should Avoid
More small businesses fail than succeed. Some studies show that up to 90% of small businesses fail in the first five years. Don’t let yours be one of them. Avoid these common financial mistakes.
Lack of sufficient start-up funding
Not having enough money is one of the main causes of failure. Unforeseen emergencies can drain cash reserves. Establish a line of credit or apply for a business loan before you need it. If your business doesn’t qualify for a loan, apply for a credit card in your name and keep it for business use only. This reserve of credit, or credit card, will allow you to take advantage of opportunities that may arise, such as supplying a major new customer, product introduction, or media blitz.
underestimate expenses
Entrepreneurs tend to underestimate expenses, especially those with which they are unfamiliar. It may come as a surprise to discover that your newspaper ad will cost three times what you expected, or that the pay-per-click (PPC) budget you thought would last a week runs out in less than a day. When projecting expenses, add a contingency factor of 8% – 10%. Base your expenses on actual expenses. If you’re not familiar with the type of expense, do some research.
overestimating income
It’s a double whammy. The expenses are more than he projected and the income is nowhere near what he thought it would be. You have spent more money and get less return. Be conservative when forecasting revenue. Use assumptions that are realistic and based on facts rather than hope.
Confused profit for cash
Some entrepreneurs confuse being profitable with cash. You can take cash to the bank, but you can’t do it with the winnings. A profit is sales/income minus expenses. If some of these sales are on credit, or on payment terms such as 30/60/90 days, cash will not be available when the sale is made, but expenses will still have to be paid.
For example: Sales were $30,000 for the month of March. The sales were from an affiliate program that pays 60 days after the sale is made. March expenses were $20,000, so your profit would be $10,000, not bad. In cash, however, you won’t see the $30,000 until June, but the expenses still need to be paid. If March were your first month of business, you would be in a $20,000 cash deficit position.
Don’t let these common financial mistakes hurt your business.