More people are venturing out and running their own business than ever before. There were 30.4 million small businesses in 2016, according to the Small Business & Entrepreneurial Council. While many people dream of opening their own business and being their own boss, some are unfortunately not prepared for all of the financial knowledge that is necessary to successfully run a company. Many small businesses commit rookie financial mistakes that threaten the livelihood and sustainability of their business. Here are some common rookie financial mistakes that first-time business owners make – and how you can avoid them.
1. Impulse Spending
Even though it takes money to make money, a common problem with many entrepreneurs is spending too much during the early, lean months of business. Yes, you can expect to have expenses or investments that will have long-term rewards. But don’t make the mistake of impulse spending. You want to have more profit than losses. How can you avoid overspending in the beginning? By clearly budgeting every single expense.
Stick to a realistic budget. And when you’re writing up that budget, include unexpected expenses as well. Include fixed overhead costs that your business actually needs to run. Anything extra can wait.
2. Getting Slack with Due Payments
Many folks who are just starting up with their business make the mistake of not having late payment penalties in place or being reluctant to collect cash. Follow up on those unpaid invoices. Make sure that your clients and your potential clients know that you don’t take this kind of thing lightly. You expect to be paid on time.
Set limits on invoices and send automated payment reminders. Use apps to remind you and your clients about upcoming payments.
3. Not Tracking Revenue
Small business owners may know numbers like their cost of goods sold, total revenue and profit margins. However, many do not keep a good handle on cash flow. 82 percent of small businesses fail because of cash flow management problems. If you do not have the money your business needs to stay afloat, you can find yourself part of that statistic.
You should make it a point and good habit to track all cash flows including the daily spending. If cash spending is left unchecked, you could find yourself in a very tight situation.
A good rule of thumb is to be able to have a 12-week forecast of money coming in and out of the business. A major cash flow drain is waiting for customers or other businesses to pay you the money they owe you. You may wait several months after a sale before you are actually paid for the work. You can automate your accounts receivable to send reminders to businesses that are delinquent. You can also offer a small discount for early or timely payment.
There are several things you can do to help keep track of revenue, such as using cash flow apps and digital bank statements. Don’t make the mistake of not planning ahead and then finding yourself in a tight financial fix at the end of the year.
4. Not Utilizing Technology to Get Ahead Financially
How is your e-payments and e-billing system? Do you have one in place? Internet tools and payment processes and speed up and improve your financial life drastically.
Many business owners get stuck behind the times,” still employing manual ways of doing things. If you are already using electronic billing, consider more innovative, digital ways to run your business.
For example, can you do without manual cash receipts by snapping pictures of those paper receipts and uploading the files to an app?
In the beginning, this may take some change of mentality. But, it’s more efficient in the long run.
5. Not Knowing Your State of Affairs
The key to staying on top of your financial goals is awareness. When you know the mistakes you are most likely to make or the areas that you tend to fall behind on, you can work towards more progress and better financial habits.
Try taking stock of where you are at right now and know where you want to be. Eliminate anything that is standing in the way of you reaching your financial goals. Do away with these common cash flow mistakes so that you can accumulate more wealth in the future. For more tips on running your business and working with staffing agencies, follow our blog and updates.
6. Poor Payroll Management
Businesses may expand quickly and hire employees. The Small Business and Entrepreneurial Council reports that 89 percent of small businesses that employ workers have 20 or fewer employees. Forbes notes that hiring employees too quicklyis a common mistake many new business owners make. Payroll can quickly become one of the largest expenses. If you do not timely pay your employees, they could walk off and you could face legal consequences.
One option to address payroll problems is to use payroll factoring. This option allows you to sell off your accounts receivable accounts for fast money that you can use to pay your employees and others. This option can also allow you to infuse money into your business so that you can better manage your cash flow.
Another option to decrease payroll expenses is to limit the number of employees you hire. You may be able to outsource work to independent contractors. These individuals are often experts in their field who work on a per-project basis, so you don’t have to worry about having enough work to keep them on indefinitely and are not responsible for common employer duties like tax withholding or providing benefits.
7. Underestimating Their Needs
Many small business owners fail to determine a realistic amount of money that they will need to get their business off the ground. They may underestimate the cost of real property, payroll, inventory and equipment. They may not realize that they need certain machinery until they start fulfilling orders. Some small business owners may run out of money while in the middle of an important project.
Before launching a new business, small business owners should consult with knowledgeable individuals who can give them a better sense of realistic needs to start up and maintain a business within its first few years. Small business loans and large lines of credit can help a business have the financial resources to tap into when it needs to. It is important to have working capital to pay running costs and expenses and purchase inventory while waiting to receive payment for your goods or services.