Business financing mistakes can be hazardous to not only your business growth but your very business survival. If you make these mistakes too often, you will greatly reduce any chance of achieving long-term business success.
If you’re serious about growing a profitable business, you should avoid these top 7 financing mistakes. Understanding the causes and significance of each will help you to make better decisions.
1 – Not doing 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 business activity.
This one mistake can lead to all the others in one way or another and should be avoided at all costs.
2 – No Projected Cash Flow.
No meaningful bookkeeping means you have no record or knowledge of where you’ve been. No projected cash flow means you have no idea of where you’re going.
Without keeping score, businesses tend to stray further away from their targets and wait for a crisis that forces a change in monthly spending habits.
If you do have a projected cash flow, it must be realistic. A certain level of conservatism is needed or it will become meaningless.
3- Inadequate Working Capital
No amount of record keeping will help you if you don’t have enough working capital to operate the business effectively. That’s why it’s important to create an accurate cash flow forecast before you 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 are insufficient funds to properly manage 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.
If you don’t find out what’s causing the cash flow problem in the first place, stretching out payments might 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 and indefinite periods of time.
- Overdue payments of credit cards are probably the most common ways in which both businesses and individuals destroy their credit.
- NSF cheques are also recorded through business credit reports and are another form of black mark.
- If you put off making a payment for too long, a creditor could file a judgement against you further damaging your credit.
- When you apply for future credit, being behind with government payments can result in an automatic turndown by many lenders.
It gets worse.
Each time you apply for credit, credit inquiries are listed on your credit report.
This can cause two additional problems.
- Multiple inquiries can reduce your overall credit rating or score.
- Lenders tend to be less willing to grant credit to a business that has multiple inquiries on its credit report.
If you get into a situation where you’re short of cash for a finite period, make sure you proactively discuss the situation with your creditors. This way, you can negotiate repayment arrangements that you can both live with which 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 getting profitable as fast as possible. 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.
Before short-term profitability is demonstrated, business financing is based primarily on personal credit and net worth.
For existing businesses, historical results need to show profitability to acquire additional capital.
The measurement of ability to repay is based on the net income recorded for the business by a third party accredited accountant.
In many cases, businesses work with their accountants to reduce business tax as much as possible. But, in the process, this can also destroy or restrict your ability to borrow as the business net income will show insufficient funds to service any additional debt.
7 – No Financing Strategy
A proper financing strategy creates:
finance that is required to support the present and future cash flows of the business;
a debt repayment schedule that the cash flow can service, and,
contingency funding which is necessary to address unplanned or unique business needs.
This sounds good in principle but does not tend to be well practised. Why? Because financing is largely an unplanned and after-the-fact event. It seems only once everything else is figured out, a business will try to locate financing.
There are many reasons for this, including entrepreneurs who are marketing oriented; people who believe finance is easy to secure when they need it; the short-term impact of putting off financial issues is not as immediate as other things; and so on. Regardless of the reason, the lack of a workable financing strategy is a huge mistake.
A meaningful financial strategy is not likely to exist if one or more of these 7 mistakes is made. This reinforces the point that each of the mistakes listed is intertwined and making any one of them will have a negative effect on the growth and success of your business.