I should be ashamed of myself! In this blog, I’m literally speaking from personal experience and I wish I would have known better. But instead of hiding my past, I rather swallow my pride and help every Business Owner I can, avoid making the same stupid mistakes I’ve made throughout my Entrepreneurial career. See below 10 of the dumbest financial mistakes to avoid as a Small Business Owner.
1. Forgetting that CASH IS KING!
“Cash is King!” This was probably my mentor and former employer’s favorite sentence. In the construction world, over-billing a Customer means billing for more than what is actually completed on the job at that point in time. It allows the Company to collect its cash sooner, while not having to pay its vendors until later to preserve a safe cash flow position. This philosophy alone probably saved us from going out of Business several times.
Cash is also King, because its availability allows you to negotiate better with vendors, partners and customers because you have more leverage. If you are too desperate at any given time, you run the risk of being at the mercy of your stakeholders.
Additionally, Cash puts you in a better position to take advantage of opportunities when they present themselves. If you have a unique chance to expand your services or the line of products you offer, having cash available will come in handy. As you grow, this could even be the difference maker in you acquiring a new Company or hiring employees you desperately need, so please, remember to always put Cash on a pedestal.
2. Neglecting your personal credit
This might be the area that the majority of aspiring Entrepreneurs I meet neglect the most. People are under the impression that financial institutions like Banks for example, will fund a great idea or business plan. Sorry, not in this day and age.
If you are ever in need of a loan or business credit card, and you are just starting your business or you’ve already started but it is fairly small, your creditors will directly rely on your personal credit to determine whether or not they can loan your business any money. Ultimately the question is: Can the Owner pay us back if the Business fails?
In the lender’s eyes, poor personal credit shows that you do not handle your personal finances well, which somewhat means you will not do any better with the Business, so you have to be very careful with the information that gets reported on your credit. Most institutions will not issue your Business a loan if your credit score is under 650.
3. Mixing personal and business finances
This should be obvious but so many of us make that mistake sometimes. Using the business debit card for your personal groceries, or letting a client write you a check personally for services the Business (technically not “You”) performed. And it is not smart!
By mixing personal and business finances, first, you are hurting your ability to know how well your business is performing, but more importantly, you are running the risk of losing protection of your personal assets. In fact, by creating an LLC for example, you are protecting yourself from the Business liabilities and risks. However, you could lose your corporate veil if a Court determines that the Owners of the Company did not maintain legal separation between their business and personal finances (Legal disclaimer: I am not an attorney, and this should not be considered legal advice. Please discuss with a professional).
It simply doesn’t make business sense. Your Business should be treated as a completely separate person, even if you are the sole owner.
4. Not having a Financial statement review on a regular basis
I cannot stop preaching this! Your financials are your report card, the truth about your business, your guide to answer the questions “What happened?” “What’s next”. Running a business without them is operating with a blind eye. Too dangerous! Hence, why I force every client into at least one monthly meeting to review their financials and understand them enough to make practical decisions.
5. Running your Business without projections
In the last quarter of the year, I take the time to analyze the last 12 months of Business with each of my clients and ask questions to establish projections for the upcoming year. It is a very important exercise to help us get an idea of the Company’s direction, so that the Owner and executives can decide on their next marching orders: What do we need to focus on? Where should we spend less time? Should we hire? Fire? Etc.
As good practice, when creating your budget, try not to overvalue potential revenues nor underestimate costs. Always budget more time and money than you think you would need.
6. Budgeting every month the same
All months are not created equal. There are 4 week months and 5 week months, therefore you need to learn to budget your expenses accordingly, especially if your revenues are fairly predictable.
My advice when working on projections is to divide yearly estimated totals by 52 weeks and multiply by the number of weeks in each month rather than just divide by 12. Hope that makes sense?
7. Relying on others to take care of your Business
“Prices are subject to change without notice”. Have you read these fine prints before? You probably have it on your price list, website or media kit yourself, so guess what? Pay attention to every cost in your business and shop around as often as you can to see if you can find better value because your vendors will not do this homework for you.
Challenge your Bankers also. I know changing banks can be a pain depending on the size of your Company but I wouldn’t turn down a meeting with a banker who wants to evaluate your Business and present you with some options. More often than not, you will be surprised at the amount of interest and fees you currently pay with the same bank you’ve worked with for years, just because it was convenient. And even if you decide not to switch, you can always use that information to negotiate new rates with your current banker.
8. Overlooking certain costs
When working on projections or when preparing to spend some money in a new area, we tend to budget less than we need, and sometimes because we forget the "not-so little things”. For example when hiring employees, always remember to plan for labor burden (Work Comp, taxes, etc.) and any potential benefits. That employee who just took the Job for $50,000 a year, might end up costing you 10 to 15% more than that, once you take everything into consideration. You need to plan accordingly.
9. Not understanding the legal side of things
At M.A.D. Ad Company, an Ad Tech Company that I’m also a Partner in, we made sure to have our Lawyer as an actual shareholder in our Company because we understood how important it was to cover our bases legally. Not doing so, can be extremely expensive if a bad situation arises down the road. That certainly depends on the industry you are in, but my advice is: get a great Lawyer in your corner, and do this early.
10. Not applying for a line of credit in advance
A couple of years ago, when the Advertising Agency I referred to above was in financial trouble, my Partner at the time had the strong belief that we could get a line of credit with a local bank if we tried. On the other hand, as a trained Accountant, my logical side got the best of me, and I was convinced that we would get rejected and didn’t even want to try. He went out on his own to meet with a Banker, who loved our story and business model, and ended up taking a chance on us.
This is one of those rare times where relying on too much experience would have worked against us, and my poor judgement could have cost us a much needed $25,000 operating line of credit.
I would recommend that every business Owner at least tries early on to see if their business can qualify, just to have something to use for emergency purposes. And even if you do not qualify, at least ask the right questions to your Bankers to determine what you can do to put yourself in a position to become eligible in the near future.