Cash flow is essential for small businesses. In fact, it is their lifeblood. If your cash runs out before you have steady income coming in, your business can be doomed before it ever gets off the ground. All too often, small businesses end up on the sidelines, while their owners are left emotionally and financially drained.
Thankfully, this does not have to happen to you. With a little financial planning before launching your small business, the outcome of your small business can be entirely different. Discover the biggest money mistakes made by small businesses and how to put your business on the top of the podium by avoiding them.
Underestimating the Needs of Your Business
Most travelers have heard of the saying, “bring half the clothes and twice the money.” When starting out on your entrepreneurial journey, it’s important to be prepared to bring twice as much money and twice as much time to the table.
Everything will take longer than you may have initially thought during the planning stages. There will also be unexpected costs that you couldn’t have imagined before you stepped foot into the trenches. When starting a small business, it’s important to double the numbers you have conservatively planned for. Running out of funds is the worst thing for a small business that is about to take off.
Going Too Big, Too Soon
Most entrepreneurs and small business owners have big dreams, and sometimes, their starry eyes are bigger than their wallets. In order to achieve success, you need to distinguish between the necessary aspects of your business and things that can wait. For instance, if you meet with clients on a regular basis, you will likely need a space in a professional building. However, if you are just starting your business, you do not need to rent an entire floor or suite. You will be better off subleasing one office space.
Subleasing will not only save you money, but it will also allow you to establish new professional relationships that could lead to new business. The key is to spend money on things that will create a positive impression and customer experience, not on items that have no impact on customer relations.
Spending Too Much on Payroll
As a small business, payroll is likely to be one of your biggest expenses. Employees may boost your self-confidence or seem necessary at first, but many small business owners quickly realize that their employees may be earning more than they are. You didn’t plan on starting a business to live on minimum wage, so you need to trim payroll as much as possible, especially during the beginning stages of your business.
Before adding a new member to your team, the role and expected accomplishments of every position needs to be established. Rather than hiring full-time employees right off the bat, you should look to outside contractors first. Only hire full-time employees if there is enough work to keep them busy in a specialized capacity on a long-term basis.
Not Buying Used
Resist the smooth talking salesperson and the allure of the latest and greatest model. In many cases, used items provide the same quality at half the price. When you are relying on savings or taking on debt financing to launch your business, you will achieve positive cash flow much sooner by saving on equipment. Look for wholesalers and going-out-of-business-sales. Not only will you be saving money, but you’ll be helping out a fellow entrepreneur as well.
Not Having an Exit Strategy
Entrepreneurs and business owners are eternal optimists. However, smart business owners are also well prepared. They may be taking in the sights when their parachute fails to open, but savvy entrepreneurs know where the cord for the back-up chute is and when to pull it. In the end, smart business owners must know when to fold their hand and move on to the next opportunity.
As a business owner, you need to have an exit strategy in place with an objective number that serves as the exit signal. It could be a debt level or a time frame to reach a certain profit level. Whatever it is, your objective number will tell you when to pull the chord.
An emergency fund of two to four months of living expenses should be included in your exit strategy. This will provide you with enough time to identify a new business opportunity and secure financing. Just remember to get out as soon as your number is hit. You don’t want to use your cash reserves to try and save a dying business.
Not every business idea will be a winner. However, you can be a winner if you are smart with your money and maximize your cash flow. You have to provide yourself with enough financial wiggle room and time to win, but having a solid entry and keeping an eye on your bottom line will greatly increase your chances of success.
