Evading the top 7 mistakes in business financing stands as a crucial element for the survival of any enterprise.
Frequent occurrence of these blunders significantly diminishes the possibility of achieving long-term business success.
The crux lies in comprehending the causes and importance of each mistake to empower you to make better decisions.
Mistake in Business Financing (1) – Absence of Monthly Bookkeeping.
Irrespective of your company’s size, maintaining inaccurate records gives rise to various issues concerning cash flow, planning, and business decision-making.
While everything comes with a cost, bookkeeping services are exceedingly affordable when compared to other expenses incurred by a business.
Once a solid bookkeeping system is established, the cost usually decreases or becomes more cost-effective, as no effort is wasted in documenting all business activities.
On its own, this mistake tends to pave the way for other errors, directly or indirectly, and should be meticulously avoided.
Mistake in Business Financing (2) – Failure to Project Cash Flow.
Inadequate bookkeeping results in a lack of understanding about past financials, while an absence of projected cash flow creates uncertainty about the future.
Without keeping track of financial progress, businesses tend to veer farther away from their targets, waiting for a crisis to force changes in monthly spending habits.
Even if you have a projected cash flow, it must be grounded in realism.
A certain level of cautiousness needs to be integrated; otherwise, it quickly loses its meaning.
Mistake in Business Financing (3) – Insufficient Working Capital.
No matter how meticulous your record-keeping is, it won’t be of much help if you lack the necessary working capital to effectively operate your business.
That’s why it is crucial to accurately forecast cash flow before starting, acquiring, or expanding a business.
Often, the importance of working capital is completely overlooked, with the primary focus being on capital asset investments.
As a result, a cash flow crunch is usually felt swiftly when there are insufficient funds to manage the normal sales cycle.
Mistake in Business Financing (4) – Inadequate Payment Management.
Without a robust foundation of working capital, forecasting, and bookkeeping, cash management problems are likely to arise.
This leads to the need for stretching out and deferring payments that have become due.
This practice is akin to walking on thin ice.
If the root cause of the cash flow problem is not identified, stretching out payments may only deepen the financial predicament.
Government remittances, trade payables, and credit card payments are the primary areas that suffer.
Mistake in Business Financing (5) – Subpar Credit Management.
Deferring payments for short or indefinite periods can have severe consequences on your credit.
Late credit card payments are a common path that businesses and individuals take to ruin their credit.
Additionally, bounced checks are recorded on business credit reports and serve as another detrimental mark.
If a payment is postponed for too long, a creditor might file a judgment, further tarnishing your credit.
Furthermore, being behind on government payments can result in an automatic denial of future credit by many lenders.
The situation can deteriorate further.
Each time you apply for credit, it leaves a mark on your credit report.
This can lead to two additional problems.
First, multiple inquiries can lower your overall credit rating.
Second, lenders are less inclined to extend credit to a business with numerous inquiries on its credit report.
In situations where cash is scarce for a limited period, proactive communication with creditors is crucial.
Negotiating repayment arrangements that satisfy both parties and safeguard your credit becomes essential.
Mistake in Business Financing (6) – Absence of Recorded Profitability.
For startups, the most critical aspect from a financing standpoint is achieving profitability as quickly as possible.
Most lenders require at least one year of profitable financial statements before considering lending funds based on the strength of the business.
Before short-term profitability is demonstrated, business financing primarily relies on personal credit and net worth.
Existing businesses need to exhibit a history of profitability to obtain additional capital.
The ability to repay is determined by the net income recorded for the business by a third-party accredited accountant.
In many cases, businesses work closely with their accountants to minimize business tax, which inadvertently hampers their borrowing capacity when the net income is insufficient to service additional debt.
Mistake in Business Financing (7) – Lack of a Financing Strategy.
A well-defined financing strategy encompasses: 1) securing the financing required to support current and future cash flows, 2) creating a debt repayment schedule that aligns with the cash flow, and 3) establishing contingency funding to address unforeseen or unique business needs.
While this sounds promising in theory, it is often poorly executed.
Because financing is typically treated as an unplanned event, addressed only after everything else has been figured out.
Numerous factors contribute to this phenomenon, including entrepreneurs being more focused on marketing, the misconception that financing is readily available when needed, the delayed impact of financial issues compared to other pressing matters, and so on.
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However, the absence of a viable financing strategy is indeed a mistake.
Furthermore, a meaningful financing strategy is unlikely to exist if one or more of the other 6 mistakes are present.
This emphasizes the interconnectedness of all the listed mistakes, and when multiple errors are made, their negative effects tend to compound.