Whatever business you are running, one of the key aspects to focus on is the financial position of your company. A recent study indicates that 32.1% of businesses fail due to poor financial management. Entrepreneurs can easily become enthralled with their business ideas and development, neglecting the financial side of the business and leading to catastrophic effects.
The sad reality is that many excellent and potentially successful small businesses are failing due to suboptimal financial decisions. Use the tips below as a jumping-off point to create a more fiscally responsible business.
Create and Follow a Monthly Budget
In simple terms, a budget is planning your income and expenditures to ensure that your expenses are less than your revenues, or having a plan to have the investment funds needed to cover the difference. Many people avoid completing annual or monthly budgets because they mistakenly think that it will become a straightjacket, and prevent them from expanding their business. However, when followed correctly, a budget can be very empowering as it positions the company leadership to understand the tradeoffs required to pursue opportunities.
Do Your Due Diligence Before Borrowing
Entrepreneurs are an optimistic bunch. When starting a business, many entrepreneurs are convinced that their business is going to succeed. After all, why else would anyone start a business? However, the self-confidence so important to an entrepreneur’s success is a double edged sword, and can lead to poor financial decisions. A critical decision is understanding whether to borrow money to invest in the business.
While borrowing can accelerate the resources and growth available to a business, the funds borrowed must ultimately get paid back with interest and so debt is an expense that can get out of hand very quickly. Many business owners are not factoring in risk to the equation, and taking on debt ALWAYS increases the risk of a business failing, so do everything in your power to avoid unnecessary debt. When you decide to take on debt, make sure you’ve done your research to gain favorable terms and rates, have a plan to repay the debt, and ensure the pros of having additional resources are far superior to the con of potentially losing your company, income, and assets in bankruptcy.
Don’t Rush to Employ too Many Staff too Quickly
In much the same way that debt needs to be paid every month, so do staff. For the majority of businesses, payroll is the single biggest expenditure; when business is going well and cash flows are positive, it can be very tempting to employ extra staff. Before you begin the process of hiring additional staff, analyze the current situation. Do you REALLY need those extra staff members? Are your current employees working to full capacity? As Level Office founder Bill Bennett quips,
“People are our greatest resource, and we must exhibit sincere care in offering opportunities for growth to our team before hiring more staff. It never ceases to amaze me how much a motivated person can accomplish when given a new opportunity, and it then turns into a double win as we create career and income growth for the employee who is helping the company do better.”
Another key question to ask if hiring, is if the additional revenue from the potential hire is greater than the fully loaded (salary, tax, insurance, office space, etc.) cost of employing another team member. Are you comfortable terminating this position in the event business turns down or the team member contributions are not accretive?
Train Your Customers
Cashflow is one of the biggest challenges for businesses small and large alike, and you can’t always count on your clients to pay on time. Always lay down a foundation and expectation, and only extend payment terms that allow you to conduct your business without stress. When agreeing on initial contracts, emphasize the fact that payment is due per the agreed terms, and consider the “carrot and stick” approach of offering a discount for paying quickly and an additional fee for late payment. Additionally, make your customers aware that interest will be charged after thirty days by explaining you are not a bank, and then be “firm, fair, and friendly” in your collection procedures. Here are some specific tips:
-If the invoice has not been settled after ten days, send a friendly reminder requesting payment.
-If no payment is received after 20 days, consider giving your client a call to confirm expectations.
-After 30 days, send another reminder, and attempt to schedule a time to meet the client in person.
-If the issue is persistent, work out a payment plan and consider reducing exposure to the client.
If you follow these procedures, your customers will quickly learn that you are a diligent and well-run company that requires timely payments. This should ensure cooperation and prompt responses in the future.
Don’t Pay Yourself a Huge Salary (early on)
The final trap to avoid is paying yourself too much money within the first few years of the launch of your company. Every cent that you take out of the business prevents you from re-investing that amount of cash back into the growth of your business. Take a long-term view, work out what you can “get by” on, and pay yourself accordingly. Whatever else is left, then make the decision of whether to reinvest that money in the business or give yourself a bonus. As a business owner, you will ultimately reap the benefits in the long-run of growing a great business, but it also is wise to have some cash for a “rainy day”.
Some of the concepts may seem simple, or even boring, but the fact is they work. Visit our blog regularly for more inspiration and tips on growing your business.