Business financing mistakes can be hazardous, not only to your business growth, but your very business survival. Learning about and avoiding the top 7 business financing mistakes is a key component to 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 execute better decisions.
Business Financing Mistake #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 decision-making related to your business. While everything has a cost, bookkeeping services are relatively inexpensive compared to most other costs a business will incur. And, once a bookkeeping process is established, the cost typically decreases. In one way or another, this single mistake tends to lead to all the other business faux pas I will mention. As such, it should be avoided at all costs!
Business Financing Mistake #2 – No Projected Cash Flow
Meaningful bookkeeping should make it easy to track past business transactions. Similarly, a solid sense of projected cash flow should give a good idea of what the future holds as it relates to goals. Without keeping score, businesses tend to stray further and further away from their targets, leading them to 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 exercised, or your projections will not be very helpful.
Business Financing Mistake #3 – Inadequate Working Capital
No amount of record keeping will be helpful if you don’t have enough working capital to properly operate the business. That’s why it’s 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 are insufficient funds to properly manage through the normal sales cycle.
Business Financing Mistake #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. 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 cause you to dig a deeper hole. The primary targets are government remittances, trade payables, and credit card payments.
Business Financing Mistake #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 credit card payments are probably the most common way in which both businesses and individuals destroy their credit. Second, NSF checks are also recorded through business credit reports and are another form of black mark. Third, if you put off a payment too long, a creditor could file a judgement against you, further damaging your credit. If you do get into situations where you’re short on 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.
Business Financing Mistake #6 – No Recorded Profitability
For start-ups, the most important thing you can do from a financing point of view is to become profitable as quickly as possible. Most lenders must see at least one year of profitable financial statements before they will consider lending funds based on the strength of the business. Before short term profitability is demonstrated, business financing is based primarily on personal credit and net worth. For existing businesses, historical results need to show profitability to acquire additional capital. The measurement of this ability to repay is based on the net income recorded for the business by a third party accredited accountant. 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.
Business Financing Mistake #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 six mistakes are present. This reinforces the point that all mistakes listed are intertwined. When more than one mistake is made, the effect of the negative result can become compounded.
All business owners find that they eventually need help in the area of finance. The successful ones put aside their pride and desire to be at the center of all aspects of the company and get the help. Do yourself and your company a favor and be one of the truly successful business owners.
Get an advisor and get all you can out of them. If your advisor loves what he/she does for a living as such as you love what you do, then you can’t go wrong.