If you are running a small business, then you can expect to make minor mistakes on a daily basis – it is an intrinsic part of business and the only way you can truly learn.
Unlike many other areas of business, finance is not something that many people intrinsically know about before they start a company. However, there are certain mistakes that you simply can’t afford to make. Many of these crucial errors to avoid are money-related.
This is a shame because having a strong grasp of business finance (and the mistakes you should avoid) can massively impact your company’s success.
Although it might sound daunting to prevent yourself from making these mistakes, they are actually basic and easy to avoid as long as you are sensible. Indeed, it is best to approach your business finances from a principle-based mindset, which will help you stay on the right track.
Here are the basic financial mistakes your business should avoid:
- Don’t overstretch yourself with hefty loans you can’t pay back
The most basic lesson to learn in business finance (as in life) is not to overstretch yourself with hefty loans that you will struggle to pay back. It doesn’t take much analysis to work out why. While some people (even business executives) treat loans like a license to print money, in reality, you will likely lose money unless you fully understand what you’re getting into.
Burdening your company with excessive debt can cause it to fold overnight, especially if your cash flow is inconsistent.
Of course, loans can be very useful in the right circumstances and shouldn’t be outright avoided. For example, if you want to expand your business but haven’t the necessary funds to finance it up front, taking out a loan is the traditional method for covering it.
This is not to say that a loan is necessary for that scenario. You could instead make use of an invoice factoring company. You may pose the question of what is a factoring company, and you’d be forgiven for doing so. Invoice factoring is not as common as a traditional loan, but it can actually be just as useful.
Essentially, a factoring company will pay you the money owed by a client you have invoiced but who has not yet paid you and then take over custody of the invoice. When the client does eventually pay, the money will go to the factoring company. This gives you immediate up-front capital.
- Overheads can quickly mount up – expand with care
Another basic mistake to avoid is to burden your company with expensive overheads it doesn’t need. Many small business owners wrongly believe that expanding their business before it is ready to do so is the best way to ensure success, but this is a mistake.
At a purely basic level, the more you spend on overheads like staff wages and rental payments, the less you have to take home as profit. Keep overheads to a minimum in order to safeguard the financial health of your company.
- Don’t leave yourself short – put money away for a rainy day
On a related note, it is best not to leave your business (or yourself) short on money for an extended period of time. While it can be tempting to tie up every last dime in the business, you will have nothing left to help you out when a rainy day inevitably occurs.
Make sure you keep some money saved for an emergency, and you will stand a better chance of sustaining your business through both good and bad times.
