According to the Small Business Administration, 50% of small businesses fail within five years and approximately one-third of them close up shop within the first two years.
So, why don’t most small businesses reach the 5-year mark? Because many of them make obvious, fundamental mistakes and not surprisingly, many of these are financial.
Whether you're new to business or you've had your business open for years, there are ample opportunities for errors when it comes to making financial decisions.
5 Business Financial Mistakes and How to Avoid Them
So, let’s take a look at some common business financial mistakes and how to avoid them.
1. Not Focusing on Cash Flow
Even if your business is profitable, it’s easy to be caught in a financial soup if you fail to manage your cash flow. This is one of the most common small business mistakes to avoid.
To stay on top of things, continuously monitor your cash flow, track expenses, and analyze sales, accounts receivable and other shortfalls.
2. Not Paying Attention to Loan Interest Rates and Other Charges
To run your business smoothly, taking on debt is inevitable. But, don't fall into the trap of having a high interest rate tied down to your loan.
Be it a personal loan or business loan, always consider the interest rate and other charges and fees associated with the loan. A smart move is to research and compare interest rates before taking on debt.
3. Not Preparing for a Rainy Day
What happens when you are caught in a rainstorm without an umbrella? You get drenched. Same is true for your business. If you don’t have a rainy day fund, the downpour can impact your finances drastically.
Start a savings account for business. Slowly build a reserve that’ll help your business thrive. Experts recommend six months of operating expenses as an ideal amount for an emergency.
4. Running a Business Without a Budget
Unplanned spending is one of the biggest startup mistakes. That’s why you need to have a budget in place.
Budgeting encourages you to avoid reckless spending.
5. Making Big Purchases Early in the Business
When you start a new business, your excitement knows no bounds. You want to invest in new technology, get the best-in-class software, hire talented staff and build a flashy website. But all this comes at a huge cost, which you probably can’t afford, especially if you are in the nascent stage of your business.
So, review your buying decisions very carefully. Always ask yourself if the big expense is going to help you strategically grow your business and generate more revenue.
In the initial stages of your business, make do with the bare minimum. Accumulate a good amount of disposable cash, then spend on fancy “nice-to-have” things.
Manage Your Money Well
It’s easier to lose money than it is to earn it.
A single financial mistake can be the cause of your business failure. You can avoid these common financial mistakes. Plan your budget, monitor your cash flow, save for emergencies and always spend on things that are essential for business growth. You are then set for success!
Shiv Nanda is a financial analyst who currently lives in Bangalore (refusing to acknowledge the name change) and works with MoneyTap. Shiv is a true finance geek, and his friends love that. They always rely on him for advice on their investment choices, budgeting skills, personal financial matters and when they want to get a loan. He has made it his life's mission to help and educate people on various financial topics.