Avoiding Common Financial Mistakes in Business
It is unfortunate, but an awful lot of business failures can be put down to financial mistakes. Equally unfortunately, many of these failing businesses make very similar mistakes.
Banks and financial advisers alike are clear that there are a number of common financial mistakes made by new and fledgling businesses, such as failing to take sufficient account of the need to get your cash-flow right.
This page is designed to help you to avoid some of these common financial mistakes. This should give your new business, whether franchise or home-grown enterprise, the best possible chance of survival in the longer term.
1. Get Your Funding Choices Right
There are a number of ways to fund a business.
You can put in your own savings, you can borrow, either from a formal lender like a bank, or from family and friends, and you can issue shares or equity in return for finance.
These choices matter, and it is wise to think about them carefully in advance.
You may think that money is money, and it does not matter what source you use, but this is not necessarily true. For example:
- Banks do not like to lend to a business that does not look like it will be able to repay the funds. It therefore makes more sense to seek a loan before you start trading, when your business plan looks good, and reality has not yet struck. That way, if things get tough, you will already have the loan. Crucially, you will also not have spent all your own money, and will be able to use your savings to tide you over.
- Many banks will only lend for expansion to someone who can also put some of their own cash into the business. Angel investors also like to see that you are investing yourself. You therefore need to hold back some of your own money so that you can do some ‘match-funding’ if necessary.
Thinking carefully about your financial choices, and making sure that they match your business plan, are therefore important ways to support your business into the future.
2. Timing is Important: Why Cash-flow is not the Same as Profit
One of the main reasons why businesses fail is that they do not have the cash available to pay their bills when they fall due.
This can happen even to businesses that, on paper, look profitable. Over the course of a year, they may have more money going in than out, but if they do not have cash on the day the bill falls due, they could go bust. In just the same way as you may well end up with an overdraft if your mortgage payment goes out the day before your salary goes into your bank account, your business needs cash to flow in the right order.
Turnover is vanity, profit is sanity, cash is reality
Anonymous, but widely quoted.
When projecting your finances, therefore, it is vital to look at how cash flows in and out of your business, and particularly to make sure that it flows in before it needs to flow out again!
3. Have a full set of financial projections
- and then monitor your business’s performance against them
You need to draw up a proper business plan (and there is more about this in our page on Developing a Business), and it needs to include realistic and complete financial projections. Obviously, you cannot predict the future, but you need to be as realistic as possible.
Once you start operating, you then need to track your finances against your projections. If you have got it badly wrong, you may need more money or—worst case scenario—your business may fail. Keeping track gives you early warning of problems, and gives you a chance to address them before they become serious.
4. Make sure that you know what you are doing, and understand your limitations
Nobody expects you to know and understand everything about running a business from the first day.
If you do not understand finance, however, you are likely to be in trouble from very early on.
You can give yourself a fighting chance by doing a training course in basic business finance, or in particular areas that you find most difficult. There are plenty of colleges providing this kind of course, or you can look online for cheap or free resources (though do be aware that, to some extent, you get what you pay for).
You also need to make sure that you have a good and trusted accountant and/or other financial adviser to help you. Professional advice is essential to ensure that you are confident that you are complying with tax and legal requirements on filing accounts. Your accountant also needs to be up to speed with your business aims, to make sure that your accounts are presented appropriately, and to help you monitor your business finances appropriately.
5. Consider your exit strategy
It may sound odd to be thinking about how you get out of the business before you have started, but it is important.
Consider where you want the business to go, and how you plan to get out of it. This is particularly important for franchises, which run for a fixed term, but it also helps for other businesses. Consider:
- Do you plan to keep running the business and grow it over time, perhaps gradually stepping back to allow a manager to take over?
- Do you hope to be bought out by a bigger company? In which case, which purchasers might be interested, and what would you need to do to make your company more attractive, and therefore more valuable?
- Do you plan to sell on your business as a ‘going concern’? If so, you need to be thinking about what a potential purchaser might be looking for, and make sure that it is there.
These considerations affect how you will run the business, including your short-, medium- and long-term goals. It is worth putting some time in to think about them, and be clear about your aims.
If in doubt, ask…
There are plenty of reasons not to know the answers to financial questions. There are, however, no excuses for not finding out. There are plenty of sources of information to help you avoid making these common financial mistakes.