Everyone can appreciate the value of cash. But, a new business start-up is usually the most sensitive when it comes to the power of cash. Here are three common mistakes that can lead to major stress for a new business venture.
ONE: Overspending in the Beginning
Entrepreneurs often think their business ideas deserve the highest quality expenses to get the ball rolling. For example, spending more on trendy decor or fancy electronics than budgeted. The best question to ask when it comes to impulse purchases is, “does this expense directly lead to profit in the business?” If you are already over budget and the answer is ‘no’ or ‘maybe,’ then skip the impulse buy. Overspending on unnecessary expenses makes your break even point further away. When it comes to pricing out start-up costs, I encourage clients to get a price on the high-end option, a price on the low-end option, and then pick one in between as a compromise. Spending too much unnecessary cash in the beginning of your operations can cripple your business.
TWO: Overestimating Revenues
It’s great to be optimistic about a new business venture, but it’s not so great to be unrealistic in your revenue forecasting. While there’s no sure way to accurately forecast the future, being realistic and conservative about future sales growth is always the best approach. A steady growth percentage by each quarter is a good strategy. For example, maybe a 10 percent increase in sales over the next three months. Estimating a 200 percent sales increase in 30 days is usually not the best forecast for most industries. No matter which method you select, make sure to base your future sales expectations on objective facts and sound judgement. By avoiding overestimating your revenues, you may reconsider a few impulse purchases (see #1 above).
THREE: Letting Receivables Slide
If you start a service-based business or a B2B (business-to-business) company, you may need to offer payment terms for your customers. This usually means invoicing after providing the services with payment dates within 10, 20, or 30 days. A major stress can happen when these customers don’t pay in a timely manner. As you start the business, be sure to promptly follow up with any past due customers. Sure, it can feel aggressive to e-mail the day after a missed payment, but if your customers know they won’t hear from you the moment a payment is late, you set the tone for allowing a steady stream of delayed payments. Be proactive on receiving the cash that’s owed to your business.
By avoiding these cash mistakes, you’re putting your business on the right track to success. As you start and grow the business, you’ll see that properly managing cash is the way to go.
(Source: Amber Bennett, Consultant, UGA SBDC in Gwinnett)