When running a business, it is extremely important to watch finances. The success of your business is based on finding ways to save on cost and expenses, along with using financial services that can help you run the business more efficiently.
Before diving into the one big mistake that a surprising number of businesses make, let’s take a big picture look at the role of financial management in a small business. This will help you understand how to organize your priorities.
Neglecting the Important, Favoring the Urgent
One reason many small businesses do not stay on top of their finances — although this may seem a rather obvious thing to do — is because they neglect the important in favor of the urgent.
Something important will create a sustainable future while something urgent will take care of things now. While it’s important to stay on top of your finances, it’s urgent to find new customers and take good care of existing customers.
For a business to do well, it needs to focus on both the important and the urgent. Usually, however, the urgent is pursued at the expense of the important. In the beginning, this may seem a reasonable way of running a business until the important is set aside a little too long. Then by the time the important itself becomes urgent, it’s a little too late. Making a distinction between important vs urgent is essential to nipping financial mistakes in the bud.
Common Financial Mistakes
What common financial mistakes do small businesses make? Actually, the list is exhausting. Here are a few examples:
- A small business may not have enough cash flow.
- It may ask for credit when it’s too late.
- It may commingle funds, mixing personal and business funds.
- It may fail to keep accurate records.
- It may underestimate its tax burden.
Yet, while each of these deserves attention, the biggest and most common mistake made is the first: insufficient cash flow.
Although there are many reasons for cash flow problems, there is one solution that can take care of any of them. TBS Capital Funding describes this solution as invoice factoring. What, exactly, is invoice factoring? It begins with sending out an invoice for the goods or services your small business provided to another company. A third party factoring provider gives you cash the day you send out your invoice. They wait to get paid because the customer may have terms that allows them to pay within 30 or 60 days. Since your business now has sufficient cash flow, it can focus on getting more clients, hiring more people, or taking other steps to grow the business.
Cash Flow Problems
When businesses fail, they do so for one primary reason: they run out of money to keep trying again. Even if a business has a bad product, a poor marketing campaign, or settled for the wrong target money, it can make course corrections if it has enough money. With enough money, it has a second chance.
However, even if a business has everything working perfectly, the right product marketed in the right way to the right people, it can still run into cash flow problems and go out of business. Money is the lubricant that keeps the wheels of industry rolling. Even if you’ve built the best possible engine, once money runs out, everything grinds to a stop.
How can a business that is doing everything right run out of money?
This can happen for several reasons:
- A business may overestimate the rate of earning and the volume of revenue earned.
- It may underestimate its overhead and new operating expenses.
- It may receive a high volume of sales but have a gap between when customers make payments are when it has to pay its expenses.
- It may experience a sudden problem, like the loss of a major customer, a late payment, several non-payments, or an unexpected expense.
- It may grow at a faster rate than it has the capacity to handle. This may cause it to need more raw materials or services than it has the money to pay for.
Why Good Businesses Have Financial Problems
Quite often entrepreneurs who start a small business are not the best ones to manage it. An entrepreneur by nature is forward-thinking, and managing a business requires a different mentality, patience with the boring, even tedious, work of bookkeeping. While it is possible to find people gifted in visionary thinking and keeping books, it is rare. Thus, the best businesses are those that have someone who makes the money working with someone who manages the books.