Small businesses face many challenges while striving to make a name for themselves in their niche. Some of the common problems that small businesses and startups face include poor management, difficulty in market penetration, insufficient talent, and inadequate funding. It’s hard enough for entrepreneurs to try and keep up with major players in the market and carve an impression for their brands without having to deal with these issues.
One of the most frustrating and devastating challenges for small businesses is cash flow. According to a recent study, 82% of small businesses fail due to cash flow management problems. This article drills deep to the root of this problem by identifying some of the avoidable mistakes that small business owners make, leading to financial instability. Read on to learn how you can prevent your small business from falling into a financial crisis.
Stating Off with Inadequate Cash
Starting a business with insufficient cash spells doom from the very beginning. Some entrepreneurs knowingly go into business without solid financial backing, while others underestimate the amount of money they need to start a business. But in both scenarios, the results are the same.
There are many ways you can source funding for your business to avoid venturing into the market short-handed. Many entrepreneurs are keen on attracting investors during the early stages of their companies to get that much-needed financial boost.
Mark Stevens is one such investor who helps startups and small businesses get on their feet and launch to new heights. In his 30-year experience in the business world, Mark has partnered as an investor with many companies in various industries, including tech, real estate, and agribusiness. He understands what it means for businesses to have a helping hand, especially during the early infancy stage.
Combining Business and Personal Finances
You’ve probably heard it said that you shouldn’t mix business with pleasure; this wise saying can be extended to “don’t mix business and personal finances.” Most small businesses are managed and run by a sole proprietor. Although such a business model has its benefits, some business owners are tempted to combine their personal and business accounts, which is wrong.
Although you can obviously fund your business from your personal savings or income through bootstrapping, you shouldn’t withdraw from your business accounts to cover personal expenses or purchases and vice versa. Combining personal and business accounts can cause you to lose sight of the business’ financial performance, leading to ill-informed financial management.
Keep both financial entities separate to get a clear picture of how your business is doing. Both the business and personal accounts contain what is plainly your money as a sole proprietor, but each account should serve its purpose without overlapping with the other.
Poor Financial Planning and Bookkeeping
When running a business, it’s crucial to set your financial goals and business objectives. One way to make sure your business stays on track to achieve its goals if coming up with effective bookkeeping and financial management systems.
Some entrepreneurs don’t feel the need to have an elaborate financial plan for their business, which is a costly mistake. A financial plan should include things like expected revenue and expenses, ways of funding business ventures, taxation and insurance compliance, and debt management. A detailed and realistic financial plan defines your business path and guides your flow of cash.
Not Preparing for A Rainy Day
Businesses are inherently risky. In most cases, you can never accurately plot business performance because some of the key factors are external variables that cannot be predicted or that the business has no way of controlling. Most small business models can’t protect themselves against disruptive elements such as economic recessions, natural disasters, crime, changes in popular culture, and shifts in the political climate.
With that in mind, you should consider having a fallback plan when things take an unexpected turn—wise entrepreneurs set aside some money as an emergency fund for getting out of sticky financial situations. Like personal emergency savings, businesses too need to have an emergency stash. Without this, some businesses usually end up deep in debt while trying to take care of cash emergencies.
Making unnecessary and Huge Purchase
In a bid to accelerate growth, some small business owners make unnecessary purchases that end up hurting the financial path of their business. Such purchases are often made based on unrealistic business expectations or bad advice. Before putting a huge chunk of your money on the line, make a careful consideration of the ROI value of whatever you’re purchasing. The same goes for talent hires. Invest in assets that your business really needs to avoid spending too much on things that don’t add tangible value to your enterprise.
Business management often makes the difference between business failure and success. However, starting and running a business is no easy undertaking; small mistakes can ruin everything, especially when it comes to finances. Remember, if you don’t feel confident enough to handle your business finances properly, you can always seek the assistance of a financial advisor or consultant.