You may have the best business ideas, but without a strong financial strategy, you will struggle to stay in business for long. A company has little worth if they don't have the finances to support it and bring their ideas to life. Of course, acquiring the capital to kickstart your business is only the first step. Keeping cash flowing and investing in a way that helps your business grow is the real challenge.
Financial difficulties are the second most common reason for start-up businesses failing in their first few years of existence. As a result, companies have been forced to close due to a lack of capital before they could even accomplish their vision.
Financial decisions are critical. One wrong investment decision can be the beginning of the end for your business. In this post we will explore the different ways businesses sink, pointing out critical financial decisions your company should watch out for.
Not Maintaining Cash Flow
Just as blood circulates throughout your body to keep you alive, cash flow circulates throughout your business to keep it running. If you're a startup trying to get a footing in the market, you'll need to keep a close eye on your cash flow. Any blind spot where money is spent could be the source of your company's demise.
So much so that a study by a U.S Bank found that 82% of businesses failed due to poor cash flow management skills. It is crucial that you first understand your company's unique financial demands to manage this financial aspect of your organization. Then, after observing and analyzing these demands, you and your financial advisers may devise a strategy for managing cash flow.
American businessman and former Club for Growth president Chris Chocola states, "…one of the earliest lessons I learned in business was that balance sheets and income statements are fiction, cash flow is reality."
So indeed planning is the key to maintaining a stable organization. This brings us to to the next financial decision that will sink your business.
Forgetting to Set a Clear Budget and a Forecast For Your Business
The industry you work in, as well as the level of trust you have with your clients, will have an impact on how far ahead you can forecast your cash flow. The key is that you need to be projecting, whether it's for four weeks, four months, or four years. And it has to begin right away. As a business owner, you must have a system in place from the beginning that allows you to know what is flowing in and out of your firm at any given time.
Businesses benefit from forecasting because it allows them to make informed business decisions and establish data-driven strategies. Financial and operational decisions are based on current market conditions as well as forecasts for the future. Past data is compiled and examined to uncover patterns, which are then utilized to forecast future trends and changes. Forecasting enables your business to be proactive rather than reactive.
And just to be clear - this doesn’t need to be done on an outdated Excel spreadsheet. Today, with the help of modern technologies several spreadsheets solutions have emerged. The one we have found to be the most effective is DataRails software for budgeting, forecasting, and planning that uses Excel as its user interface creating an effortless transition that requires a simple implementation process.
Setting a clear budget and a forecasting plan early on will be one of the best decisions you’ll ever make– and will help to protect against any nasty surprises in the future.
Hiring Carelessly
Making hasty hiring decisions is a terrific way to throw yourself into serious financial difficulties. Hires often come with many expenses that go far beyond a simple paycheck. Not only must you be certain that you have enough capital to afford recruitment costs, new equipment, training, and other expenses, but you must also be certain that you have enough work to cover the wages of your new staff.
An unsuitable recruit can affect your company’s work quality and become a barrier to productivity, creating financial issues. They can cost you in the form of low productivity and even clients. One too many of such hirings and your business can sink.
According to research from HR firm Robert Half, 39% of recruiting managers and HR professionals have lost productivity as a result of a bad hire, with 11% claiming that a bad hire has cost them sales.
This is a mistake that far too many businesses make. You've gained some traction and are beginning to see some success, only to have it all wiped out by the financial impact of one poorly timed hire. Alternatively, two or three. Before you know it, a once-profitable company with a lot of potentials is struggling– salaries aren't paid, bills are piling up, and the company is dead in the water. Therefore, don’t rush the recruiting processes and take the necessary steps to hire suitable candidates for the job.
Blurring the lines between Personal and Business
Running a business is a tremendous achievement, and the cash flow in the early years may entice you. As a result, it may be tempting to combine your business and personal finances in one bank account, but this is not a good idea. You'll simply end up spending your company's money on personal goods and vice versa.
Spending funds from the company's cash flow reservoir for personal needs can cause significant financial dents. If there are enough of these dents, the entire roof can collapse at once, and you'll find yourself short on funds. You'll run out of funds for important investments.
This behavior will lead you to a lot of problems and force you to close your business. You won't be able to examine your personal and corporate finances separately in this approach. This psychological line must be drawn so that you know which spending should be attributed to which account without influencing the other.
Credit Card Debt
Many business owners forecast future revenue and invest by using credit cards to incur debt. However, the market's unpredictability can create changes in a variety of areas, resulting in unexpected outcomes.
For example, if you're planning a large project with significant revenue potential, you might not hesitate to take on debt in any form. However, you will be unable to repay your debt if you do not examine the aspects that may affect your revenue project, as well as any unexpected events that may obstruct your development. As interest accrues, the debt will continue to grow, and your business may suffer as a result.
Credit cards are so popular among business owners because they are so convenient. It's alluring to ignore interest rates and the compounding costs that add up over time. However, if you do not repay the amount in full, you may face bankruptcy.
Conclusion
It's far easier to lose control of your finances than it is to bring in income. Even while practically every organization will experience some financial loss as it grows, there should be a limit. A single financial decision should not have the potential to bankrupt you and your company.
In most cases, the financial problems that drive a company to fail are the result of a succession of poor decisions. You can prevent these mistakes if you pay greater attention to your company's cash flow, eliminate blind spots, and strategize based on the current market condition. Furthermore, even if you make such mistakes, you can take immediate measures to make up for the loss before it does irreversible damage to your business.
To make more safe financial judgments, you'll need to develop strategies with the support of specialists who can help you scale your company. However, one strategy will not always be appropriate. You will need to alter your plan as your company expands for it to succeed.