Business financing mistakes can be hazardous to not only your business growth, but also to it’s survival. Avoiding financing mistakes is a key component in business survival.
If you commit financing mistakes too often, you will reduce chances for long-term business success. The key is to understand the causes and significance of each to be in a position to make better decisions.
One, no monthly book-keeping. Regardless of the size of your business, inaccurate record keeping creates all sorts of issues relating to cash flow, planning and business decision making. While everything has a cost, bookkeeping services are quite cheap compared to most other costs a business incurs.
Once a bookkeeping process gets established, the cost usually goes down or becomes more effective, as there is no wasted effort in recording all the business activity.
Two, lack of projected cash flow. Poor bookkeeping creates a lack of knowing where you have been. A business without projected cash lacks direction. Without keeping score, businesses tend to stray away from their targets. Even if you have a projected cash flow, it should be realistic. A certain level of conservatism needs to be present, or it will become meaningless in very short order.
Three, inadequate working capital. No amount of record keeping will help if you do not have enough working capital to properly operate the business. That’s why it is 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.
Fourth, poor payment management. Unless you have meaningful working capital, forecasting and bookkeeping in place, you are likely going to have cash management problems.
Fifth, poor credit management. There can be severe credit consequences to deferring payments for both short and indefinite periods of time. Late payments of credit cards are probably the most common ways in which both businesses and individuals destroy their credit. If you put off a payment too long, a creditor could file a judgment against you, further damaging your credit reputation.
Sixth, no recorded profitability. For startups, the most important thing you can do from a financing point of view is get profitable as fast as possible. Most lenders must see at least one year of profitable financial statements before they consider lending funds based on the strength of the business balance sheet.
Before short-term profitability is demonstrated, business financing is based primary 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 the firm accountant and auditors.
Seven, lack of financing strategy. A proper financing strategy creates i) the financing required to support the present and future cash flows of the business, ii) the debt repayment schedule that the cash flow can service, and iii) the contingency funding necessary to address unplanned or unique business needs.
This sounds good in principle, but is not well practiced. It seems once everything else is figured out, 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. Regardless of the reason, the lack of a workable financing strategy is indeed a mistake.