Small business owners, regardless of the industry, have first hand experience of the challenge in managing their finances from enduring and surviving financial bruises over the years.
It’s said that failures make the best teachers. While that is true, learning from mistakes of others is another great way to progress without getting the expensive bruises. Here are the biggest 5 mistakes that business owners commonly make that could cost your bottomline and longevity.
Quick Fix hiring
The fastest and most affordable way to find staff members is usually through personal connection. Especially for relatively young businesses. Although it may work in the short term, it doesn’t always turn out well in the long term.
Because they come from personal recommendations, you might overlook vital details such as their fit to the culture or if they share the same vision with your company.
SOLUTION: Curate staff members who will contribute to your daily operations and your future goals. This may mean hiring a highly experienced professional in the short term to provide needed structure to the organization or exclusively hiring professionals with the experience and goals that matche your business.
Small business owners often price themselves below the market rate for fear they are driving away customers or clients. Although pricing is important to your customers, it’s even more so for your longevity. Your pricing strategy reflects how you value your own services or products.
- Consider all of the costs involved. For example, a construction company needs to consider the cost of equipment transportation, man-power, repairs, and supplies to be able to set a price that’s fair to them and their customers.
- What are your target margins? Your pricing should be able to help you meet your gross and net profit margins without sacrificing the qualify of your product or service.
Most importantly, keep in mind that the price tag is less about the dollar amount and more about your ability to justify the valueof your service/product to your client.
piling up your A/R
Having a large number for your accounts receivables may look good on your balance sheet but if your AR keeps on going up, it only eats up your revenue. Jeopardizing your business There are several reasons why your receivable can pile up:
- Payment deadlines are too far away from completion date
- Unclear terms and conditions on your invoices
- Inefficient payment collection system
This creates a snowball effect that can place a high risk on your credit score. Lack of revenue means inability to cover debt obligations on time resulting in your credit score taking a hit
- Set clear terms and conditions on your invoices such as late payment penalties, early payment discouts, option for split payments, multiple payment terms, and/or deposit requirements.
- If you opt for split payments, spread the payment terms. Consider giving them the option for monthly payment program as well as creating an automated system to collect the payments
- Consider Invoice financing to reduce the burden of collecting payments. This options allow you to transfer the burden of reminding your clients to pay to lenders where you can get up to 90% of the invoice amounts.
Low cash reserve
The excitement of creating something new is a great motivator to get things done but at the same time, it doesn’t always lead you to the best decisions. Especially in the start-up phase. Thinking that certain items are needed now when they can wait.
Impulse Spending in the start-up phase is usually the chief culprit. Things are exciting as you’re building something new and because of this you might be more flexible with your business spending. For example, you decidef to spend on a new custom desk or coffe machine to make the working environment more comfortable.
Early Diversification before the original idea take off is a bad strategy. There is no hard guarantee that your original will gain immediate traction in the marketplace even if did well in the testing stage It might take weeks or months before the market recognizes the value you are offering.
SOLUTION: Better budgetting strategy.
Make it a point to include emergeny expenses as part of your monthly or quarterly budget. This helps you estimate the leftover amount that you can invest back into your company such as leasing a bigger space, obtaining better equipments, bonuses, or a new coffee machine as a reward
Last minute loan scramble
As a new business, you might think that getting a loan is a risky move that only place further financial burden. However, delaying the decision to obtain additional capital until the last minute,, only makes it harder to get a loan.
Last minute loan scramble usually happens when your pipeline is in trouble or your cash reserve is rapidly declining. To lenders, they see it as high risk of defaulting and thus are unwilling to work with you
Rule of thumb: the best time to get a loan is when you think you don’t need it. Usually when your business is earning a steady monthly revenue. This is exactly the right time to get additional capital.
Most lenders, when dealing with relatively new businesses, place greater emphasis on their revenue stream than credit score. To them, a steady monthly means you have the financial ability to meet the obligations. Thus, they are more willing to work with you and offer favourable rates, terms, and amount.
Places to get a business loan or credit
- Traditional lenders such as banks or the SBA. They are the first place that most business would go to when they search for loans. However, if you are a relatively new business, you would have a hard time qualifying for a loan. Some eve will not consider your application if your business is less than 2 years old.
- Alternative lending platforms. Typically online loan marketplace where you can shop for offers from a wide range of lenders. The primary advantage of this option is having a higher chance of qualifying for a loan. The majority of lenders place more emphasis on your monthly revenue stream than credit score and more willing to work with younger businesses.
Managing business finances is like walking on a tight rope. One step at a time while balancing a healthy bottomline and meeting your growth targets. While you can learn from enduring and surviving the pitfalls, you can navigate around them and establish a safety net to keep your business growing without the expensive pitfalls.