Avoiding certain business financing mistakes is a key component in business survival.
If you start committing these business financing mistakes too often, you will greatly reduce any chance you have for longer term business success.
The key is to understand the causes and significance of each so that you’re in a position to make better decisions.
1 No Monthly Bookkeeping.
Regardless of the size of your business, inaccurate record keeping creates all sorts of issues relating to cash flow, planning, and business decision making.
While everything has a cost, bookkeeping services are dirt cheap compared to most other costs a business will incur.
And once a bookkeeping process gets established, the cost usually goes down or becomes more cost effective as there is no wasted effort in recording all the business activity.
2 No Projected Cash Flow
No meaningful bookkeeping creates a lack of knowing where you’ve been. No projected cash flow creates a lack of knowing where you’re going.
Without keeping score, businesses tend to stray further and further away from their targets and wait for a crisis that forces a change in monthly spending habits.
3 Inadequate Working Capital
No amount of record keeping will help you if you don’t have enough working capital to properly operate the business.
That’s why it’s important to accurately create a cash flow forecast before you even start up, acquire, or expand a business.
Too often the working capital component is completely ignored with the primary focus going towards capital asset investments.
When this happens, the cash flow crunch is usually felt quickly as there isn’t enough funds to properly manage through the normal sales cycle.
4 Poor Payment Management
Unless you have meaningful working capital, forecasting, and bookkeeping in place, you’re likely going to have cash management problems.
The result is the need to stretch out and defer payments that have come due.
This can be the very edge of the slippery slope.
I mean, if you don’t find out what’s causing the cash flow problem in the first place, stretching out payments may only help you dig a deeper hole.
The primary targets are government remittances, trade payables, and credit card payments.
5 Poor Credit Management
There can be severe credit consequences to deferring payments for both short periods of time and indefinite periods of time.
Late payments of credit cards are probably the most common ways in which both businesses and individuals destroy their credit.
if you put off a payment too long, a creditor could file a judgement against you further damaging your credit.
Also, when you apply for future credit, being behind with government payments can result in an automatic turndown by many lenders.
That’s not all there is to this case, each time you apply for credit, credit inquiries are listed on your credit report.
This can cause two additional problems. First, multiple inquiries can reduce your overall credit rating or score. Second, lenders tend to be less willing to grant credit to a business that has a multitude of inquiries on its credit report.
If you do get into situations where you’re short cash for a finite period of time, make sure you proactively discuss the situation with your creditors and negotiate repayment arrangements that you can live with and won’t jeopardize your credit.
6 No Recorded Profitability
For startups, the most important thing you can do from a financing point of view is get profitable
Most lenders must see at least one year of profitable financial statements before they will consider lending funds based on the strength of the business.
For existing businesses, historical results need to show profitability to acquire additional capital.
7 No Financing Strategy
A proper financing strategy creates the financing required to support the present and future cash flows of the business,
Having a financing strategy can help with contingency funding necessary to address unplanned or unique business needs.
This sounds good in principle, but does not tend to be well practiced, this is because financing is largely an unplanned and after the fact event.
It seems once everything else is figured out, then a business will try to locate financing.
There are many reasons for this including: entrepreneurs are more marketing oriented, people believe financing is easy to secure when they need it, the short term impact of putting off financial issues are not as immediate as other things, and so on.
Regardless of the reason, the lack of a workable financing strategy is indeed a mistake.
However, a meaningful financing strategy is not likely to exist if one or more of the other 6 mistakes are present.
This reinforces the point that all mistakes listed are intertwined and when more than one is made, the effect of the negative result can become compounded.