If employees are the lifeblood of a business, then the cash is the soul.
Without funds, it’s impossible to start a business. And without adequate funds, your business could grind to a halt. Yet, over 80 percent of the small businesses that fail do so because of a financial problem.
As a business owner, this stat no doubt gives you sleepless nights. It should, but the good news is financial problems in business are avoidable. But to be able to avoid them, you need to know what they’re, right?
Continue reading for a guide to common business financing errors and how to avoid them.
Inadequate Startup Capital
Starting a business with inadequate capital is a common mistake among small entrepreneurs.
You can tell how the story goes. You start a business with whatever amount you have hoping that the business will pick up soon after launch.
The only problem? New businesses can take longer than forecast to start generating revenue, let alone make a profit. If your new business runs out of capital and you’re unable to get emergency funds, failure becomes imminent.
There’s a simple fix to this common business financing problem. Establish the amount of money you need to start and run a business till it is sustainably making money and get the full amount before starting the business.
If you have to start without full capital, ensure you have a solid business financing strategy.
Mixing Personal and Business Finances
27 percent of small business owners use the same checking account for personal and business reasons. Many more use business funds for personal activities and vise versa.
Mixing personal and business finances might not seem like a mistake, especially if you are a sole proprietor. But this is dangerous for a couple of reasons.
One, you could unknowingly spend business money on your personal errands. Imagine making a $5K impulsive purchase over the weekend only to realize that you don’t have enough money to pay suppliers in the coming week.
Two, come tax time, it’ll be difficult to categorize business income and expenses. As a result, you could file erroneous tax information and even miss out on small business deductions.
Three, business financial reporting becomes difficult. You won’t be able to easily put numbers in front of metrics such as recurring revenue, churn rate, and customer acquisition cost. Have a look to learn more about these metrics.
Business Credit History
Failing to build a business credit history is a common financial mistake.
You might not like loans, but in the course of running a business, you might need to get a business loan or a business line of credit. To get either of these credit facilities, your business needs to have a credit score.
Just like your individual credit score, a business credit score enables lenders to determine your company’s creditworthiness before making a lending decision.
Start building business credit early by taking out small loans or business credit cards.
Avoid These Common Business Financing Errors
In business, as in life, managing money is one of the hardest skills to master. But in business, the consequences of financial mismanagement are greater. With this guide, you now know the common business financing errors and how to avoid them.
All the best and keep reading our blog for more small business advice.