Running a business is tough. That’s probably why, according to Bloomberg research studies, 80% of businesses fail within the first 18 months.1 It’s a shocking stat, and one of the biggest causes of failure is financial mismanagement by owners.
The unfortunate reality is – even if you do go to school for entrepreneurship – business finance problems and solutions aren’t emphasized enough. Even if you don’t go to business school, a quick Google search for “entrepreneurship” demonstrates the most-popular keywords associated with the topic of starting your own business:
- Entrepreneurship ideas
- Entrepreneurship ideas with low investment
- Entrepreneurship ideas for the beginner
Financial challenges faced by entrepreneurs are often glossed over, both at business school and by society at large. So, it’s not surprising that small business owners often don’t recognize mistakes they are making with their finances until it’s too late.
Not being able to identify or fix business finance problems quickly can all lead the owner down a difficult path. Seemingly small things, such as no emergency fund, poorly handling business debt, and missing a vendor payment, are all symptoms of larger problem. Ultimately, it doesn't matter how good your idea is or how strong your customer base is; if you can’t properly manage your business’s finances (or hire someone who can) your business won’t be around for long.
Financial issue example: Swissair
Organizations of all types and sizes – even those that are profitable – can fall prey to poor financial management. Take Swissair, the national carrier of Switzerland, as an example. The airline, founded in 1931, used to be so financially stable that it was dubbed the “flying bank.”
However, everything came crashing down in the 1990s when the board followed an aggressive borrowing and acquisition strategy. The terrorist attacks of September 11 brought demand to a standstill and added to the airline’s financial losses. Crippled by business debt, the airline closed for good in 2002.
Being aware of small business financial problems isn’t just essential for overcoming them; it can also help you to better understand the health of your business. If you’re struggling, it’s important to recognize the warning signs of financial trouble early. Once you are aware your business may be in jeopardy, you can start taking steps to fixing problems.
If you want to make a success of your business, here are five common of financial mistakes that you need to avoid.
5 common business financial mistakes:
- Mixing personal and business funds
Combining your personal and business finances will never turn out well, even if it initially seems like a good idea. However, when you combine the two, it makes it difficult to evaluate each individually when the time comes, and could lead to major headaches, and even legal trouble, down the road. Also, it is going to be a yearly headache come tax time in April when you have to separate out business income and expenses from personal income and expenses. It is easier to keep them separate from the start.
A clear delineation between business and personal accounts will give you a better understanding of the real health of your business. Being able to have an at-a-glance view of your business account is key to its success – and it starts with a separate business account and credit card.
- Not having an emergency fund for your business
Every business owner will face an unexpected hurdle in one form or another. There’s no way to know when these hurdles will appear, but with a business emergency fund, you’ll be ready for them.
A business emergency fund will provide cover for any unexpected expense, whether it is a tax bill or a repair bill. With an emergency fund, your business can continue to operate as normal.
Without an emergency fund for your business, you run the risk of having a crisis when unforeseen incidents occur. Many owners turn to merchant cash advances and other forms of quick cash infusions to deal with the unexpected. While these solutions may offer short-term relief, the long-term impact of these types of financing can be devastating. The sky-high interest rates and fees that normally accompany these financing methods significantly increase the monthly expenses of your business, often to the point where you have to seek additional financing options to pay off the originals. This is a death spiral for your business and should be avoided at all costs.
- Missing payments
It is natural to try to delay paying bills for as long as possible. But paying them late and skipping them entirely are two very separate things.
If cash flow becomes a problem, you may need to choose between paying a supplier and paying off a non-vendor debt. Ultimately, this is not a choice you should be making. While delaying payment to a vendor may result in an unhappy email or an angry phone call, failing to pay a creditor will result in even more debt in the way of fees, late charges, and perhaps even higher interest rates.
If you are starting to miss or delay payments to your vendors regularly, this is a huge red flag that your business may be in financial difficulty.
- Not paying yourself
You might think that making the self-sacrifice of not paying yourself for the sake of the company is the “right” thing to do. However, it very rarely is the right choice, especially when you are starting out. After all, you are running your business to make money for yourself. If you aren’t taking care of yourself by paying yourself a salary, no one will.
It doesn’t stop with a salary, either. You should be thinking about your financial future: that means setting up a 401K to start putting money towards your retirement.
In a perfect world, you would treat your salary as an expense and pay yourself first. If you can’t pay yourself first, you should at least make sure you pay yourself out of your revenue every month as soon as you can. If the cash flow of your business is too tight to allow yourself to do this, your business is not sustainable.
- Taking on too much business debt without a plan
One of the biggest misconceptions out there is that business debt is bad. When you’re running a business, there are certain scenarios where it is actually in your best interest to take on debt, especially if that business debt allows you to operate more effectively.
However, taking on too much debt without a repayment strategy could be a problem. High-interest rates and large monthly repayments can dramatically increase your monthly expenses, making it harder to increase your cash flow enough to pay off the debt. It can be a vicious cycle.
If you have taken on too much business debt without a plan, you should speak to business debt professional like Creditors Relief immediately. If you’re receiving daily collection calls, have fallen behind on payments, or are worried about losing your business, Creditors Relief can help.
Our number one goal is to find the best debt solution for your business. That may be reducing your overall business debt or quickly increasing your cash flow by reducing your payments. We will do whatever we can to save your business from closing.
Our professional debt consultants will give you a free phone consultation right now when you call us at 877-312-6478. We will develop a budget that you can follow today and we will work out how we can help you to minimize the debt you have taken on.
We’ve helped companies of all types and sizes achieve immediate debt relief. If you want to take your business from the red back into the black, Creditors Relief can help. We have settled millions of dollars in debt, and we can help you, too.