When you run a business, it is inevitable that you will make more than your fair share of mistakes. While some of these things are small learning curves which you can recover from, others could end up being terminal for your company. Financial mistakes can be business-threatening, which is why if you can avoid making the errors in the first place, you will put yourself on a much firmer footing. In this article, we are going to discuss in more detail the seven deadly sins of business financing, so you can read, learn, and not make them in your own company.
Spending Money Before You Have it
Don’t start counting your money before it hits your bank account. This is especially important advice when you are first getting started in business. Yes, you may have secured some big orders for yourself, but you never know how difficult it is going to be to prise the money from your clients. There is an enormous difference between having revenue and almost having it. If you start spending the money before you actually have it and a deal falls through, you could find yourself in financial straits which are difficult to recover from.
Borrowing Money Because People are Willing to Lend it
Just because a bank is offering you a loan to grow your business, it doesn’t mean that you always have to take it. After all, the bank is not doing it from the kindness of its own heart! Make sure that you have made a plan for where the money will be spent if you do take the loan. Ensure that it will go to a good cause – namely growing your business in some way. Borrowing money can also lead to stress which will distract you from the successful running of your business.
Not Keeping a Close Enough Eye on Finances
Of course, there are a million things on your plate when you are an entrepreneur, but that doesn’t mean that your finances should take a backseat. You need to make sure that you sit down on a regular basis to analyse your incomings and outgoings, looking for ways that you can run your operation more efficiently. Financial modeling software can help to make that process much more simple. Also, it is worth hiring an accountant who is adept at finding ways to save you money.
Pricing Too Low
You are almost always better off selling fewer units at a higher price rather than trying to sell a lot at a low price. After all, you are not running a big business so you aren’t in a position where it is okay to take the loss. So, you need to make sure that you analyse your margins carefully. Of course, you want to give your customers a good deal but you also don’t want to risk your business going under. If you price too low at the start, you are going to frustrate customers if you suddenly have to make a big increase.
Offering Customers Credit
When you offer credit to your customers, you end up becoming a bank rather than a service or a product provider which is what you set out to be initially. A common cause of business failure is that they cannot collect receivables and manage cash. This is not a route that you want to go down yourself, especially if you are only just getting started in business which is when you are at your most vulnerable financially.
Relying on a Single Source of Revenue
Look at your revenue as if it was an investment portfolio. If you have a single client who you rely on to provide you with a huge percentage of your revenue, you are putting yourself in a very risky position which could backfire were you ever to lose them. Of course, when you are just starting out in business, you will want to concentrate on a nice, but over time, you should look for ways that you can build more diversity into your company.
Having Overheads which are Too High
The longer you run a business and the more it grows, the higher the likelihood that you will start to build up overheads which spiral out of control. For example, when you hire a new member of the team, ask yourself whether you really need a full-time employee or whether this is a service which could be outsourced or covered by a freelancer.