5 Common But Deadly Financial Mistakes that Kill Small Businesses
by John-Paul Iwuoha and Dr. Harnet Bokrezion
Up to 80 percent of small businesses often die within the first 18 months. This is both a sad reality and a mind-blowing suicide rate by any measure. I call it ‘suicide’ because most small businesses actually kill themselves without knowing it.
Entrepreneurs and small business owners often form bad habits and make harmful decisions that ensure their businesses don’t survive. This article looks at five common financial mistakes that many businesses make. If you already run a business, no matter how small, you may already be guilty of a few. Here they are…
#1 – Not Keeping Financial Records
Financial records are like temperature readings of your business. They provide important and invaluable information that acts as an advance warning system. Most times, businesses don’t fail without showing signs and symptoms. How can any business succeed if it lacks the discipline to keep records? How can you know if you’re making profits (or losses) if you don’t write down or record your incomes and expenses?
Accountability is a basic ingredient of success in any business (big or small). Guess what? You don’t need to be an expert accountant to keep up-to-date financial records. Simple and user-friendly software tools like QuickBooks Online, FreshBooks, Xero and Zoho Books can take all the stress off you.
#2 – Confusing Revenue With Profits
It’s very important that you understand the difference between these two terms. Revenue (also known as Sales or Turnover) is the money that flows into your business from selling your products or services to customers. Profit is the difference between money that flows into your business (revenue) and money that flows out of your business (costs).
Many small businesses fail because they mix up these two. That there’s a lot of money coming into your business doesn’t mean it’s profitable. The unfortunate thing is, your business may look healthy on the outside, but be very sick inside. It may only be a matter of time before the entire business crumbles.
Don’t confuse revenue with profits. No profits, no business!
#3 – Spending Money On Things You Don’t Need
The truth is, entrepreneurs really don’t need a lot of stuff we spend money on at the beginning of our businesses. Large office space, more employees than necessary, fancy consultants can often be bad ideas. We often waste the precious capital we need to keep the business alive. By the time we realize our mistake, it’s usually too late to make any amends.
The lesson here is to start and run your business on a ‘lean’ model. A lot of unnecessary fat can negatively affect the health of your small business. Avoid fat. If you already have some in your business, make the hard decision and cut them off now. If not, they may just cut you out of business soon!
#4 – Short Term Expectations
Some businesses start to turn a profit in their first week of operation. Many others don’t make any money at all until a year or two afterwards. Sometimes in life, things don’t always turn out the way we plan for them to be. And because the future is uncertain, it only makes sense that we prepare ourselves for the surprises that will most likely come up.
I’m not a pessimist at all but I find that it often helps to assume the ‘worst case’ scenario when you’re starting a business. When you take a long term view for your business, it is less likely that you will become frustrated when you don’t see any profits in the first six months. With a long term perspective, you are likely to spend wiser and not waste money on those things that do not really matter in your business.
#5 – Not Paying Yourself A Salary
Starting and running your own business is such a powerful feeling. It means you’re the boss; the biggest gorilla in your forest! You don’t take instructions or orders from anyone and you can do as you please. Unfortunately, this feeling makes many entrepreneurs treat their businesses like an ATM; an automatic cash machine that produces money for their private use and entertainment.
Get it straight; you may be the boss almighty but your business is separate from your personal life. If you want your business to survive and grow, you will have to respect its financial independence. If you want to be able to take money out of the till, work harder. The harder you work to grow your business, the more money your business makes and, as a direct consequence, the salary you earn can be higher.
So, there they are; the five most common financial mistakes that small businesses make. Are you guilty of any of these? Please share your experience. I’m sure lots of people could learn from it.