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.
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.
Not Paying Enough Attention to Cash Flow
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.
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.
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 quickly is 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.
Not Engaging Customers
Small businesses may make a product but never ask for feedback from their customers. Customers should love the product. If they do not, it is important to consider making changes to it and respond to the suggestions of customers. Customer engagement should be a daily duty.
Many new business owners commit these mistakes. However, getting the necessary assistance before launching the business can help new owners avoid them. With the proper guidance, business owners can thrive as entrepreneurs.