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Common Finance Mistakes Small Businesses Should Avoid
More small businesses fail than succeed. Some studies show
that as much as 90% of small businesses fail in the first five years. Don't let
yours be one of them. Avoid these common finance mistakes.
Lack of Sufficient Start-up Funding
Not having enough money is a major cause of failure.
Unforeseen emergencies can eat up cash reserves. Establish a credit line or
apply for a business loan before you need it. If your business doesn't qualify
for a loan, apply for a credit card in your name and keep it for business use
only. This credit reserve, or credit card, will allow you to take advantage of
opportunities that may pop up, such as supplying a new major customer, product
introduction, or media blitz.
Underestimating Expenses
Entrepreneurs have a tendency to underestimate expenses,
especially expenses they're not familiar with. It can be a shock to find out
that newspaper ad is going to cost three times what you expected or that the
Pay Per Click (PPC) budget you though would last a week is used up in less than
a day. When projecting expenses add in a contingency factor of 8% - 10%. Base
your expenses on actual expenses. If you're not familiar with the type of
expense do some research.
Overestimating Revenues
It's a double whammy. Expenses are more than you projected, and revenues aren't nearly what you'd thought they would be. You've spent more
money and you're getting less return. Be conservative when forecasting
revenues. Use assumptions that are realistic and based on fact rather than
hope.
Confusing Profit for Cash
Some entrepreneurs confuse being profitable with cash. You
can take cash to the bank you can't do that with profits. A profit is
sales/revenues minus expenses. If some of these sales are on credit, or on
payment terms such as payable after 30/60/90 days, the cash won't be available
when the sale is made, but the expenses will still have to be paid.
For example: Sales were $30,000 for the month of March. The
sales were from an affiliate program that pays 60 days after the sale was made.
Expenses for March were $20,000 so your profit would be $10,000, not bad.
However, on a cash basis you won't see the $30,000 until June, but the expenses
still have to be paid. If March was your first month of business, you'd be in a
cash deficit position of $20,000.
Don't let these common finance mistakes hurt your business.
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