Every entrepreneur dreams of owning a successful business, and money is the ultimate yardstick of success. Proper money management is an essential element of business growth and profitability, while mismanagement of funds can render all attempts at survival futile.
A majority of small business owners end up in the latter scenario because they make the following money mistakes.
1. Thinking there’s no need for a business plan
Business owners who do not formulate a foundational business plan from the start may find themselves in a financially awkward position.
For one, they don’t have a document detailing their business narrative to convince investors to take a chance on their business idea. Additionally, they have no set objectives, be it financial or operational, to measure whether the business is moving in the desired direction, which is especially important in the first year.
Not having a business plan means the business is operating blindly, creating potential opportunities for fund mismanagement.
2. Intermingling business and personal finances
One way for a small business – or any business for the matter – to create an accounting nightmare is to mix personal and business funds.
The person and business are two entities that need always to be separate. Not only does intermingling these accounts show a lack of professionalism, but it also complicates the process of determining the profits and losses of the business.
One would have to comb through each transaction to separate the business-related items from the personal. This process is a time-consuming and error-prone process and could even lead to some missed tax deductions if done inefficiently.
3. Not having a rainy day fund
When starting a business, the owner can have high hopes for their idea and forgo putting something extra aside for a rainy day. The driving thought is that capital will generate as the business operates over the course of time, and the right move is to invest all the funds into the company instead.
This a colossal money mistake as having insufficient funds can send the business to an early grave.
It can take months for a business to see steady cash flow and even longer to realise any actual profit. During this time, cash reserves can play a significant role in keeping the company afloat until the rainy days are over.
4. Being afraid of taking on debt
It can be a great source of pride for entrepreneurs to own a profitable business without incurring any debt. After all, they have saved and scraped enough to get the business off the ground, and they feel they deserve to enjoy all profits.
While keeping a business going using your funds (boot-strapping), especially at the start, is noble, it is not a sustainable approach to growth and profitability. Small businesses have many cash flow needs and underestimating them is a huge money mistake.
However, many business owners fear taking out a loan when it could be what they need to meet their immediate cash-flow needs, such as salaries and reinvesting in the business.
Moreover, the loans don’t need to be hefty loans. Many alternative lenders offer non-collateralized loans with flexible payment terms that can suit the needs of any business without sending them deep into debt.
The dream of owning a successful business is one that is highly attainable, but money mistakes have sent promising SMEs to their deaths. They say the first five years are trying times for small businesses, and this is when good money management practices need to be ingrained in the minds of all entrepreneurs. While it can be frustrating, it is also one of the best ways to ensure ultimate survival.