VWB Blog Many people have heard exaggerated and intimidating statistics about how often small businesses fail within a few years. The truth is, about half of all small businesses make it at least as long as 5 years. At the same time, only one out of every three businesses lasts longer than 10 years.
When you look at what leads many businesses to fail, you discover the same few business money management mistakes that people commit over and over again. However, there is a bright side to this fact. If most businesses fail because of the same few mistakes, then avoiding these few mistakes can go a long way to increase your chance of business success.
So what are some of the most common business money management mistakes, and how can you avoid them? Read on to learn all about the most important things to understand about how to manage your business’s money as well as possible!
1. Not Tracking Business Spending in the Beginning
Many businesses have more available capital in the early days. However, the fact that there is excess cash starting on leads many people to spend it as if it were infinite. All too soon, the days of being flush with cash are over, and businesses are struggling to make it from month to month.
Many of these problems could be diminished if people were more careful with their initial capital. Try to spend your money just as carefully when you have plenty of it as when you are running out.
At every stage in the process of growing your business, it is important to focus on spending money to make money, not just because there is something that seems appealing to spend money on.
2. Not Creating a Business Emergency Fund
Many businesses compound the first error by committing a second. They fail to put away any money at all in case of business emergencies.
Many people steer their business by keeping track of recurring expenses and problems, making sure to have enough to get by.
However, keeping track of known expenses and problems is not enough. There is always the chance of unknown expenses as well. If you have only enough to barely scrape by while managing typical expenses, your business may suffer disproportionately when unknown expenses arrive.
For that reason, it is essential to have an emergency fund on hand. This is even more important in the early days of building a business. There is a much higher chance that you will make mistakes in the early days, so that is when you need to have an emergency fund available most of all.
3. Failing to Notice Unprofitable Products
Companies get excited about the plethora of goods and services that they can provide. Business owners dream of reaching more and more customers as they offer a wider variety of goods and services. However, the more goods and services a business offers, the harder it is to keep track of each one’s profitability.
In some cases, businesses continue to offer goods and services even when they are no longer profitable.
It is important to track each offered good or service for its return on investment. You need to look not only at the direct costs of providing them but also at the indirect costs that are necessary to maintain readiness to provide them.
If the net result is that a given good or service is not profitable, it is important to stop spending money on it.
4. Spending Money on Unprofitable Activities
Many of the same principles apply to business practices. Many businesses get into a routine when it comes to things like marketing. If you are not careful, you might end up pouring more and more money into old marketing techniques, even as they provide fewer and fewer results.
Many businesses fail not so much because they cannot generate enough revenue but because they spend it too haphazardly.
It is also important to remember that a dollar saved is worth more than a dollar earned. How can that be?
Every extra dollar that your business earns will be affected by taxes. As a result, you will end up with less than a dollar extra that you can actually spend.
On the other hand, every dollar you save is a full dollar that you can spend on anything. In many cases, businesses find success by cutting expenses rather than focusing only on increasing revenue.
5. Deemphasizing Managing Cash Flow
Many businesses simplify their money management processes and fail to distinguish between value and cash flow. There is a big difference between $1,000 in liquid assets and illiquid assets.
If too much company value is tied up in illiquid assets, then you may be much closer to failing than you realize. Make sure to pay special attention to cash flow and make sure that you can maintain your business in the short and long run.
6. Not Setting Business Financial Goals
As simple as it may sound, some people fail to set clear business goals. The clearer your goals are, the clearer it will be whether or not you are reaching them. Don’t make the mistake of avoiding setting goals because you do not want to come to terms with the fact that you are not meeting them.
7. Failing to Learn About Money Management Strategy
No matter how good your business model is, you should always be updating it. Every mistake is an opportunity to adjust your processes for greater profitability and efficiency.
Understand How to Avoid the Most Common Business Money Management Mistakes
Most business owners are more interested in their product or service than in learning about common business money management mistakes. However, focusing on both is essential if you want to succeed in business. No matter how great your product or service is, you will not succeed without reliable money management.
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