Five Financial Mistakes Made by Small Business Owners
Regardless of your industry or how much experience you have as an entrepreneur, certain mistakes can hugely affect a business. One thing that most successful entrepreneurs say day in day out is that there is no template for success. That is certainly true since no one follows a certain procedure to become successful. The experience of being a business owner and turning into a successful one is unique from company to company.
Bear that in mind, there are certain things that are true universally. Making some mistakes as an entrepreneur will sink a business into losses. Furthermore, it may even lead to closure after a long period enduring losses. Making financial mistakes, especially for a new business may be more hurting. That requires the entrepreneur to be more vigilant in dealing with any mistake that may lead to dire effects. Here are five major financial mistakes that small business owners make put their companies in jeopardy. For every business owner, you should strive to ensure you avoid these mistakes to stay solvent and start thriving.
Failing to monitor your business credit score
It is imperative to note that every business has a business credit score. This number is entirely separate from your personal credit score. The business credit score tells the story of your business’s history with debt. Some of the factors that affect that number include your payments history, your debt utilization ratio, and your length of history. Various lenders will give much emphasis on these factors. However, they are things that you have a great deal of control over.
As you scale your business, the business credit score number becomes immensely important. It will not only help you securing business financing in the future, but it is a public record too. If another business is considering extending but your business credit score is low, they could decline to extend you net terms. Alternatively, the best option they have is to offer you less-favorable terms.
Waiting too long to apply for financing
It is wrong to wait until you are in the midst of an emergency to apply for a small business loan. Even as there are many uses of money in a business setup, you should not wait until the last minute. If you are unfortunate and do not obtain the funds, you jeopardize your business operations. In most cases, we always do not know when disaster strikes.
Nevertheless, many business owners wait until they find out they have nothing in their accounts. If the lenders notice that the lending is a desperate measure, they may take advantage. The loan may be more expensive, with high-interest rates and shorter repayment periods. All these are unfavorable conditions that no entrepreneur would want.
Not Paying Attention to Cash Flow
Many experts concur that cash flow is one of the most consistently reliable indicators of a business’s health. Cash flow gives a business owner a sense of business survival in the short term. Moreover, an entrepreneur should see whether it is possible to make fixed-cost obligations through cash flow projections.
Entrepreneurs who do not follow their finances on a daily basis are at a major disadvantage. Many financial advisors compare this with living and not caring for the well-being of your body. To solve this mistake, it is prudent to maintain a reliable cash flow. Always remember that understanding cash flow has a substantial bearing on many other elements of your business.
Overlooking investment in marketing, sales, and research
It is often easy for entrepreneurs to take marketing to be a secondary and less important business engagement. Such business owners go on to make the mistake of investing in marketing and sales. They only assume that a product will sell itself if they build a good brand with quality products. Although you have high-quality products and a renowned brand, you should not assume that customer would find you naturally.
For maximum sales, you should ensure that you have to meet people where they are and invest in customer research. In addition, avoid making assumptions regarding customers. Assumptions only make you make conclusive judgments about customers that are not often true. Rather, take time to research about available markets, their preferences, and needs.
Ignoring the sunk cost fallacy
As a small business owner, you should understand that sometimes you put time and money into ideas that may not work. Nonetheless, you have to be proactive and cut your losses. That is the idea behind the sunk cost fallacy. This is an idea that we must keep pursuing an investment even when it is not working. The primary cause for the sunk cost fallacy is because we have invested so much in something.
Most notably, it is the principle behind why a gambler stays at the table only to lose more. It is also the reason why an investor keeps money in a dwindling stock, waiting for it to go back up. Instead of spending more time and money on something that is falling apart, read the cues and move on. Consequently, you will wisely save yourself a lot of frustration and trouble in the end.
