Seven Mistakes To Avoid In Financing Your Business
Avoiding business financing mistakes is a key component in business survival. If you commit these business financing mistakes too often, you will greatly reduce any chance you have for long term business success. The key is to understand the causes and significance of each so that you are in a position to make better decisions.
- No Monthly Bookkeeping: While everything has a cost, bookkeeping services are dirt cheap compared to most other costs a business will incur. And once a bookkeeping process gets established, the cost usually goes down or becomes more cost effective as there is no wasted effort in recording all the business activity.
Regardless of the size of your business, inaccurate record keeping creates all sorts of issues relating to cash flow, planning, and business decision making. By itself, this one mistake tends to lead to all the others in one way or another and should be avoided at all costs.
- No Projected Cash Flow: No meaningful bookkeeping creates a lack of knowing where you have been. No projected cash flow creates a lack of knowing where you are going.
Without keeping score, businesses tend to stray further and further away from their targets and wait for a crisis that forces a change in monthly spending habits.
Even if you have a projected cash flow, it needs to be realistic. A certain level of conservatism needs to be present, or it will become meaningless in very short order.
- Inadequate Working Capital: No amount of record keeping will help you if you don’t have enough working capital to properly operate the business.
That’s why it is important to accurately create a cash flow forecast before you even start up, acquire, or expand a business.
Too often the working capital component is completely ignored with the primary focus going towards capital asset investments. When this happens, the cash flow crunch is usually felt quickly as there is insufficient funds to properly manage through the normal sales cycle.
- Poor Payment Management: Unless you have meaningful working capital, forecasting, and bookkeeping in place, you are likely going to have cash management problems.
The result is the need to stretch out and defer payments that have come due. This can be the very edge of the slippery slope. If you don’t find out what is causing the cash flow problem in the first place, stretching out payments may only help you dig a deeper hole.
The primary targets are payroll, remittances to regulators, trade payables, and sundry payments.
- Poor Credit Management: There can be severe credit consequences to deferring payments for both short periods of time and indefinite periods of time.
First, late settlement of payables, like supplier credit, is probably the most common way a business can destroy its financing plan.
Second, if you put off a payment for too long, a creditor could file a judgment against your company, which further damages its credit.
If your business gets into situations where it is short of cash for a finite period of time, make sure you proactively discuss the situation with your creditors and negotiate re-payment arrangements that the business and its creditors can live with and that won’t jeopardise new credit.
- No Recorded Profitability: For startups, the most important thing your business can do from a financing point of view is to get profitable as fast as possible.
Most lenders must see at least one year of profitable financial statements before they will consider lending funds based on the strength of the business. Before short term profitability is demonstrated, business financing is likely to be based primary on personal credit and net worth.
For an existing business, historical results need to show profitability to acquire additional capital. The measurement of this ability to repay is based on the net income recorded for the business by a third party accredited Accountant.
In many cases, businesses work with their Accountants to reduce business tax as much as possible but also destroy or restrict their ability to borrow in the process when the business net income is insufficient to service any additional debt.
- No Financing Strategy: A proper financing strategy must have the following elements:
(a) The financing required to support the present and future cash flows of the business.
(b) The credit repayment schedule that the cash flow can service.
(c) The contingency funding needed to address unplanned or unique business needs.
This sounds good in principle, but does not tend to be well practiced. Why? Because financing is largely an unplanned and after the fact event. It seems that once everything else is figured out, then a business will try to locate financing.
There are many reasons for this. For examples, entrepreneurs are more marketing oriented. People believe financing is easy to secure when they need it. The short term impact of putting off financial issues are not as immediate as other things.
Regardless of the reason, the lack of a workable financing strategy is indeed a mistake. Sadly, a meaningful financing strategy is not likely to exist if one or more of the other six mistakes are present.
This reinforces the point that the seven mistakes listed here are intertwined. A business that fails to avoid these mistakes in inadvertently compromising its chances of success.