Financial issues are common in business. Yes, every single business out there has struggled to make ends meet at one point or another. And within its lifetime, your small business won’t be different, even when you’re a good manager!
However, knowing the most common ways a business fails with cash flow means you can reduce the damage when falling into the same mistakes. With that in mind, here’s how to watch out for easily avoidable financial issues within the first year of running a business.
Avoiding Financial Issues In The First Year: Never Spend on a Whim
You might think spending on a whim is hard to do in business. After all, this isn’t your personal account, and you never have money to spare! But in truth, it’s a lot easier than you’ll first believe.
New software and hardware you don’t need, paying for a bigger server or storage space that you can’t use yet, and even buying coffee for the office every morning are all examples of impulse spending. You think you need these items without really considering if they’re crucial!
Be mindful of your spending and focus on essential expenses. Avoid making large purchases or taking on unnecessary debts in the early stages of your business. Look for cost-saving opportunities like negotiating better deals with suppliers or exploring more affordable marketing strategies.
Billable hours need to be paid on time and to the penny. That means you need to know how to fill out a timecard, at the very least, and hopefully be aware of where your employees are and what they’re doing at all times. Part-time work, overtime shifts, staying late to help clear a project – all of these things must be taken seriously. If you don’t pay attention, you could lose much money in the payroll system and never get it back out again.
Know the most common sources of business debt
Business debt is very, very common, and some of it is even good. But once again, this good debt can easily turn bad if you let the sources go too far. Spending on a business credit card is the most common offender here; paying for ‘small’ expenses here and there will help you to build up your line of credit and improve your loan chances in a couple of years.
But if you’re always loading up things on that card, you won’t be able to pay it back in the end. Remember, you’re a small business with limited funding sources. The less you spend, the safer you are, especially when keeping equity at bay as you develop.
Don’t lie about your cash flow
The one person you’re likely to lie about this to? Yourself. And when you convince yourself that things are fine and they’ll balance out next week or month, you’ve already fallen into this trap. Be serious about how your cash is flowing and your liabilities; it’ll help minimize the effect of a low-profit month at the beginning or end of the financial year. Financial issues are the bane of the small business world. Take yours seriously now for success later on.
Create a comprehensive business plan
Develop a detailed business plan that outlines your goals, target market, pricing strategy, and projected expenses and revenues. This will help you stay focused and make informed financial decisions.
Build a realistic budget: Determine your startup costs, ongoing expenses, and revenue projections. Be conservative with your estimates and include a buffer for unexpected expenses. Stick to your budget and regularly review and adjust it as needed.
Separate personal and business finances
Open a separate business bank account to separate your personal and business finances. This will make it easier to track income and expenses and ensure you have a clear picture of your business’s financial health.
Cash flow management is critical for small businesses. Keep track of your incoming and outgoing cash to ensure you have enough liquidity to cover expenses. Consider implementing strategies to improve cash flow, such as offering discounts for early payments or negotiating favorable payment terms with suppliers.
Secure adequate funding
Identify your funding needs and explore different financing options. This may include personal savings, loans from family and friends, small business loans, or seeking investors. Ensure you have enough capital to cover your startup costs and sustain your business until it becomes profitable.
Keep thorough financial records
Maintain accurate and up-to-date financial records to track your income, expenses, and taxes. Consider using accounting software or hiring a professional bookkeeper to help you manage your finances effectively.
Monitor and manage debt
If you need to take on debt to start or grow your business, make sure you have a solid management plan. Keep track of repayment schedules, interest rates, and fees associated with loans or credit lines. Avoid excessive borrowing and make timely payments to maintain a good credit score.
Diversify your customer base
Relying on a few key customers can be risky. Aim to diversify your customer base to reduce the impact of losing a major client. Continuously market and prospect for new customers to maintain a steady flow of revenue.
Seek professional advice
Consider consulting with a financial advisor or accountant who specializes in small businesses. They can provide valuable insights and help you navigate financial challenges specific to your industry.
Remember, the first year of any business can be challenging, but you can increase your chances of success with careful planning, budgeting, and financial management. Stay proactive, adapt to market conditions, and be prepared to make adjustments along the way.