As an entrepreneur, you have a million considerations claiming your time. But it’s vital that you keep your feet on the ground and never lose track of the one thing that matters most: cash flow.
Keeping the money flowing isn’t easy, which is why running out of cash is one of the top reasons for small businesses failure. Unfortunately, business finance can be a minefield, and far too many new entrepreneurs fall victim to these 5 basic mistakes.
Not planning ahead
Starting up a business can be an expensive exercise, so you’ll need funds to keep you going until you start to turn a profit. But getting funding for an SME can be a tricky business, since even alternative ‘fintech’ lenders often require a record of profitable trading before they’ll offer finance.
Unless you have a clear strategy in place for acquiring and managing finance BEFORE you start spending money, you could quickly end up in crisis. Any of your own or your backers’ money that you invest in your start-up could be lost forever if you can’t raise the funds to get your venture properly off the ground. Besides a business loan there are 12 other ways to fund your startup.
Not knowing your numbers
Hand-in-hand with careful planning goes thorough monitoring. It’s vital that you (or your trusted financial advisors if numbers aren’t your speciality) conduct a regular review of your financial performance – including detailed and realistic cash flow projections.
Reviewing your current and past performance using important tools such as profitability ratios will show you whether you’re on or off-track, and help you identify and correct issues before they become too serious.
Understanding which products, sales channels, marketing campaigns and customer relationships are draining or generating profits is essential if you’re going to make informed and effective decisions about the future of your business.
And looking ahead, to make sure you’ll have the cash to meet immediate and future obligations, will give you the time to take remedial action (such as negotiating with creditors) before you end up in default.
Growing your sales can be very exciting – but turnover only counts if the numbers on your P&L translate into cash in your bank. Entrepreneurs who seek turnover at any cost often end up on the fast track to disaster.
Instead, focus on steady, profitable growth. Before pursuing new opportunities, make sure the up-front costs in labour, materials or infrastructure won’t leave you desperately short of working capital – and that the extra sales will generate enough profits to cover the additional expenses.
Not prioritising working capital
Working capital is the lifeblood of your business. It’s the cash buffer that enables you to pay for the essential services you need to keep your operations running – everything from stock and wages to utilities and insurance (not to mention tax).
These are the non-negotiable expenses of running a business, and it’s critical that you have enough cash on hand to meet these obligations when they fall due, even if you experience a temporary downturn in sales.
That may mean delaying investment in your business – for example, holding off on employing new staff, buying equipment or moving into your own premises – until you have a comfortable reserve under your belt.
Destroying your credit rating
This disastrous error is a natural consequence of all the others – if you find yourself short of cash you may be forced to delay payments to creditors or miss credit card instalments.
Black marks on your credit rating can have a lasting impact on your business – increasing the cost of finance or even making it impossible to secure, even after (if!) if your financial situation improves.