7 Critical Business Finance Errors for Small Business
Avoiding the top 7 mistakes in business finance is a key component of business survival.
If you start making these corporate finance mistakes too often, you will significantly reduce your chances of long-term business success.
The key is to understand the causes and importance of each one so that you are able to make better decisions.
>>> Business Finance Errors (1) – No monthly accounting.
Regardless of the size of your business, inaccurate record keeping raises all kinds of issues related to cash flow, planning and business decision making.
While everything costs a lot, accounting services are dirt cheap compared to most other costs a business will incur.
And once an accounting process is established, the costs usually decrease or become more cost-effective, as there is no waste in registering all the operating activities.
In itself, this one mistake tends to lead to everything else in some way and should be avoided at all costs.
>>> Business Finance Errors (2) – No projected cash flow.
No meaningful accounting creates a lack of knowing where you have been. No projected cash flow causes you to know where you’re going.
Without keeping a score, businesses tend to move farther and farther 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 should be realistic.
There must be a certain degree of conservatism present, otherwise it becomes meaningless in a very short order.
>>> Business Finance Mistakes (3) – Insufficient working capital
No record keeping can help you if you do not have enough working capital to run the business properly.
This is why it is important to make a cash flow forecast accurate before starting, acquiring or expanding a business.
Too often, the working capital component is completely ignored with the primary focus on investment in capital assets.
When this happens, the cash flow crisis is usually felt quickly because there is insufficient funds to manage properly through the normal sales cycle.
>>> Business Finance Errors (4) – Poor Payment Management.
Unless you have meaningful working capital, forecasting and bookkeeping in place, you will likely have cash management problems.
The result is that the payments that are payable must stretch and postpone.
This may be the point of the slippery slope.
I mean, if you do not notice in the first place what is causing the cash flow problem, expanding payments can only help you dig a deeper hole.
The primary targets are government transfers, creditors and credit card payments.
>>> Business Finance Errors (5) – Poor Credit Management
There can be serious credit consequences for delaying payments for both short periods and indefinite periods.
First, the late payment of credit cards is probably the most common way businesses as well as individuals destroy their credit.
Secondly, NSF checks are also recorded by business credit reports and it is another form of black mark.
Third, if you settle a payment for too long, a creditor can file a judgment against you, further damaging your credit.
Fourth, if you apply for future creditworthiness, the government lender can automatically come to an end through author payments.
It’s getting worse.
Each time you apply for credit, credit inquiries are listed on your credit report.
This can cause two additional problems.
First, several queries can lower your overall credit rating or score.
Second, lenders are less likely to lend to a business with a multitude of inquiries about the credit report.
If you are wrong during a particular period, you should proactively discuss the situation with your creditors and negotiate arrangements with which you can live and do not jeopardize your credit.
>>> BusinessFailures (6) – No recorded profitability
FinanceFor beginners, the most important thing you can do from a financing standpoint is to be profitable.
Most lenders need to see profitable financial statements for at least one year before considering borrowing money on the strength of the business.
Before showing short-term profitability, corporate finance is primarily based on personal credit and net worth.
For existing businesses, historical results must be profitable to raise additional capital.
The measurement of this repayment ability is based on the net income recorded by an accredited accountant for the business.
In many cases, companies work with their accountants to reduce business taxes as much as possible, but also destroy or limit their ability to borrow in the process when the business’s net income is insufficient to pay any additional debt.
>>> Business Finance Errors (7) – No Financing
Strategy Creating a proper financing strategy 1) the financing needed to support the current and future cash flows of the business, 2) the cash flow repayment schedule, and 3) the contingency funds needed to meet unplanned or unique business needs.
It sounds good in principle, but doesn’t tend to practice well.
Because financing is largely an unplanned and post-factual event.
Once everything seems to be figured out, then a business will try to find financing.
There are many reasons for this: entrepreneurs are more marketing oriented, people believe that financing is easy to secure when they need it, the short-term impact of eliminating financial problems is not as immediate as other things, and so on.
Whatever the reason, the lack of a workable financing strategy is indeed a mistake.
However, a meaningful financing strategy is unlikely to exist if one or more of the other 6 bugs are present.
This reinforces the point that all said errors are intertwined and if more than one is made, the effect of the negative result can be exacerbated.