Plenty of factors can contribute to a business venture’s failure. A lack of consumer interest or bad marketing tactics just to name a few. But perhaps the most deadly contributor to startup failure is not knowing how to manage your business finances. In this article, we will look at 6 big mistakes, that are being made over and over again by entrepreneurs not thinking about their money in the right way.
1. Borrowing money when you don’t really need it, but when the bank is willing to lend it
Just because a bank is willing to lend you money does not mean you should accept it. The bank is in business to collect interest and not to optimize your financial performance. Sometimes these two goals meet somewhere near the middle, but it is not as often as you might think. It’s not that bankers seek to take advantage of business people; it’s only that their objectives and yours are very different. In general, borrow as much as you need to grow your business. The problem with credit is not that there is too little available; it is that people get too much of it. Borrowing money adds a huge burden to your business, a stress that can often cascade into your personal life.
2. Pricing too low
Unless you are Walmart or are trying to be (and have a real hope of achieving this), it is almost always better to sell fewer units at higher prices than to sell more units at lower prices. High prices protect your margins and also enhance your brand. Even 5-10 percent price increases can make a significant difference to the bottom line. Conduct deep industry research on pricing, and then price at or near the market average—maybe even a little above it. When people start a business, they tend to price low to differentiate their offer. Instead, spend time and develop a real product or service differentiation so you can command higher prices.
3. Counting on one major source of revenue
You should look at your revenue as if it were a portfolio; you do not want all or a majority of revenue coming from one or a few sources. Of course, when you start out, you are often so busy serving your first few customers that it is difficult to build other accounts or business. But, with time, you should build alternative sources of revenue, so when major revenue streams die off (which they tend to), you are still building your overall business. Differentiation is the key-word here.
4. Hiring too much overhead
People at companies bring in sales, build products, or serve customers. You can justify employees filling these roles. The real challenge is when you hire “overhead” people, who cost the company money but don’t sell or produce anything directly. Countless managers, specialists and consultants are what drives your payrolls sky-high. Of course, the real magic is created by properly deploying overhead people because they can help you get your business to the next level.
5. Mixing personal and business finances
It’s tempting to cross the line, but keep these two entities completely separate. It makes it easier for accounting, budgeting and reconciling both sets of books, and assists in determining actual profits and losses for the business.
6. Impulse spending during the start-up phase
When starting a business, it’s easy to be swept up by the excitement of it all – buying a custom-made desk, company cars and so on. But before you know it, you’re eating into the bottom line and your profit margin. The solution is to scrutinize every expense for cost-benefit. Every cent should count towards improving the business in a measurable way.
Did you spot yourself in our big mistake list? If so, take advantage of this new knowledge to get a proper grip on your finances, otherwise, you’ll be swimming in debt and filing for bankruptcy sooner than you may think.