Running a business is no easy task. Despite good effort and hard work, half of all businesses fail within the first five years. For many, business failure has less to do with the product or service they’re selling and more to do with their financial strategy. In fact, 82% of failed businesses reported cash flow problems as the reason for their failure. Perhaps that’s oversimplifying, but it’s another reminder that the way you handle your money can make or break your business.
You may not be able to anticipate every financial dilemma in your future, but if you’re careful, you can avoid common mistakes like the ones we’ve listed below. Most are not about immediate profits, losses, or spending. Rather, many business blunders trace back to high-impact decisions that change your financial trajectory. You can alter it for better or worse depending on how you address major topics like these.
1. Don’t Consult Financial Professionals
There’s nothing wrong with the do-it-yourself mindset. In fact, it has a lot of benefits. However, all DIY projects involve some risk, since your level of experience may lead to low-quality results. This is especially true of your finances. Though you can get away with doing your own taxes, bookkeeping, or payroll, most business owners decide to employ professionals.
In fact, 71% of business owners outsource their tax preparation. They also rank accountants as the most vital professional employed by their business, even more important than an attorney, banker, or insurance agent. It’s a worthwhile investment–spending a little of your hard-earned capital on professional services will help to protect your cash flow and enable you to focus on other aspects of your business.
2. Hire the Wrong People at the Wrong Time
There are several ways to go wrong with hiring. It’s an expensive process, so taking on employees before you’re financially capable may set you back more than expected. You’ll need around $4,000 dollars to find, interview, onboard, and train one new employee, in addition to the allotted salary and benefits you plan to offer.
That doesn’t mean you should be afraid to hire–one of the best investments a business can make is in its personnel. Talented employees will increase your revenue both directly and indirectly, so sometimes the real mistake isn’t spending too much on hiring, but spending too little to attract real talent. Don’t settle for a cheap hire, or you may find yourself missing the growth that an expert team can create.
3. Don’t Automate
Your business processes have a profound effect on your employees, your customers, your finances, and more. Even small inefficiencies can evolve into substantial issues if they aren’t resolved appropriately. For that reason, it’s important to prioritize efficiency and automate certain business tasks. The tasks best suited for automation vary based on your staff size, industry, and customer base. However, there are some general guidelines for implementing automation in any business.
One way to begin is to identify repetitive tasks. Do you respond to the same questions over and over again? An automated email or phone system would allow your employees to spend their time on more profitable tasks. If you’re unsure where to improve your processes, AI like Google Cloud or Microsoft Azure can provide expert insight that will increase your cost-efficiency.
4. Take Out the Wrong Small Business Loan
In addition to all the indirect influences on your finances, like employees or business processes, there are some concrete money matters that can ruin even the most promising business. Small business loans are one of these. Now don’t get me wrong–I’m not saying that you should avoid business loans. It’s vital, however, that you find one suited to your needs.
Capital is necessary, and having too little cash can be just as fatal as paying off a burdensome loan. You can avoid either extreme by consulting financial advisors to determine how much cash is necessary. Once you know your needs, do some research about different loan types and different lenders. Consider the pros and cons of online lenders, credit unions, and banks. Ideally, you’ll take out a loan that provides sufficient capital at a competitive interest rate, and then pay off your debt as quickly as possible.
5. Overspend on Inventory
It’s difficult to differentiate between investing and overspending. Obviously, there’s no one-size-fits-all answer here, but some investments are better than others. Buying excessive office supplies and decorations, for example, may improve your image without increasing your profits. And despite recent trends, company break rooms don’t necessarily need a ping-pong table and a soda machine.
On a similar note, if your business sells one or several products, it’s even more important to keep close tabs on your inventory. One member of the Forbes Business Council spoke of new entrepreneurs, saying that their “excitement blinds them to the reality of business”, often causing them to overspend on inventory. Overestimating the demand for a certain product can be fatal for your business, so don’t hesitate to invest in some expert forecasting to help prevent this.
There are plenty of mistakes to be made as you run a business. Some are harmless, allowing you an opportunity to learn and evolve. Other mistakes have serious financial implications that could ruin your business. Fortunately, many of those financial blunders are easily preventable.
Financial professionals can alert you to any serious problems and help you improve your processes. Hiring talented employees ensures financial growth, and automation eliminates human error in repetitive operations. And last but not least, avoiding excessive debt and unrealistic inventory prevents unnecessary losses. Steer clear of errors like these, and your business should be strong enough to keep making and correcting mistakes for a long time.
About the Author
Madison Crader specializes in content related to small business digital marketing and building brand awareness. She has a passion for helping entrepreneurs grow their business and set long-term goals.