Financial mistakes that hurt small businesses

Starting small does not mean staying small, and many entrepreneurs have visions of growing their businesses into industry titans. However, many start-ups fall by the wayside before their owners can achieve their dreams of building a defining business. What leads to the failure?

Here are 10 mistakes small businesses tend to make. 

1. Mixing personal and business expenses

As a small business owner, it is easy to mix personal and business expenses. When entrepreneurs lack a boundary between these types of expenditure, it makes proper book keeping, balancing accounts, filing taxes, figuring out overall profits and creating financial goals difficult. An easy way out is having a separate bank account for the business, which is completely off limits for any personal expenses.

2. Hiring too softly

When running a small business, it may seem cost-effective and convenient to run all departments in the business yourself. However, in the long term, this can have devastating consequences on the business. Despite the size of your company, hiring a capable team is important to properly manage the investment and take it to the next level. Finding the right talent takes considerable time and effort, but it is essential and well worth the effort.

3. Borrowing too much too early

Caught up in the big picture of growth, small business owners will tend to borrow too much too soon. This becomes a problem if sales targets are not met, as it leaves the business a slave to repayments. Be realistic about your sales projections, work with the base-case scenario and be prepared for the worst. This will ensure that the business only borrows what it needs to and can easily repay what’s owed.

4. Failure to manage cash flow

Most businesses that fail are still profitable, but have just run out of cash. Maintaining a positive cash flow is essential for the continuity of a business. Cash flow management means delaying outlays of cash for as long as possible, while encouraging your customers to pay as quickly as they can. Excess inventory, poor accounts receivable management, and poor credit policies can render bankrupt an otherwise viable venture. Small businesses should, therefore, avoid as much as possible situations that tie up cash, and put in place habits that encourage healthy cash flow.

5. Cost-cutting that compromises quality

Reducing costs during production results in cheaper products, which in turn attracts more customers. That is true, but only if the quality of the product is not compromised. Most customers will pay more for a high-quality product, even when a cheaper option is available. Instead of cutting cost, which is likely to affect a product’s quality, a business should focus on meeting customer expectations through quality products that ensure repeat sales.

6. Lack of profit and loss forecasts and budgets

Many small businesses may not see the need to forecast their sales revenue or keep an expense budget. However, the danger here is that without a plan, you never get to know when the business is off track. A simple forecast will assist to benchmark the business’ performance, while a budget helps guide how your capital is spent.

7. Poor accounting practices

Simply monitoring your cash in the bank is not enough. Without any form of financial reporting, you will lack insight into the financial trends of the business, which in turn minimises your ability to make informed financial decisions. Financial reports allow you to track performance, see where your cash is being spent and help you project where your business is headed.

8. Not having an emergency fund

Even successful, established businesses are not immune to slow periods. It is, therefore, essential that you prepare your business to avoid any cash flow problems. Small businesses should ensure that they can cover their operating expenses, even over slow periods, by having an emergency fund that is equivalent to two to three months of their operating expenses.

9. Not focusing enough on sales

Most small businesses tend to get so engaged in the product development aspect of the business that they neglect the sales aspect. Taking too long before a business puts its product out to the market, or spending most of its resources on the production process and forgetting the sales, can have a detrimental impact on the business’ bottom line. Remember, it is only through sales that a business can know what to improve on in its product or service.

10. Poor allocation of resources

In a bid to keep up with competition, small businesses may be under pressure to spend on investments that may hurt their finances. A small business may want to hire more employees, move to bigger offices or even offer better employee benefits, but what are the cost-benefit implications of each of these options? Avoid overspending by prudently allocating resources. Weighing the pros and cons of a specific expenditure will help you determine what you can live without, or will aid you in brainstorming more cost-effective alternatives.

The writer is an investment analyst at Cytonn Investments.