As a business consultant I have seen many businesses struggling because they had made very basic and avoidable mistakes. Here is my list of ten mistakes to avoid. They are not in order of importance since any one of them can have serious consequences for the business.
- Failure to Plan. This one pertains not only to start-up businesses, but for existing businesses too. A business plan provides a detailed road map for starting a business or growing an existing business. The process of systematically doing the research to determine the market and financial feasibility of an idea and developing the financial projections are the true value of the plan.
- Lack of a Record Keeping System. I am always surprised when I ask an entrepreneur if they are profitable and they answer that they don’t know! Good financial statements that can be used to make business decisions start with good record keeping. Accounting software for small businesses is affordable and can provide the management reports the owner needs at a click of the mouse. Or if this is not something you want to do you should hire an accountant to provide you monthly statements. The IRS has a publication, “Starting a Business and Keeping Records,” that can get you started in the right direction.
- No Understanding of Financial Statements. I’m not saying that every entrepreneur has to become an accountant to successfully run a business, but the successful owners are the ones who have a basic understanding of how to read and interpret their Profit and Loss Statement, Balance Sheet, and Cash Flow Statement. Do you know the difference between cash and profits? They are not the same. Many business owners use the shoe box approach to accounting. They hand their accountant a box of receipts at tax time, sign the completed tax returns and wait until next year to look at their numbers again. Financial statements are one of the tools that owners need to be using to manage their businesses throughout the year.
- Poor Cash Flow Management. A recent survey of 500 small business owners by CPA2BIZ found that cash flow management is the major issue facing small business owners. The survey found that 51 percent of owners do not use budgets or forecasts. We have all heard the saying that for a business “cash is king.” A business can show a profit, but run out of cash. Another way to look at it is “Profits are what you pay taxes on. Cash is what you put in the bank.” Budgeting or projecting cash flow is one of the most important exercises a business owner should be doing. If the projection shows you will be short of cash two months down the road, you need to be doing something about it now!
- Poor Credit/Collections. One of the primary causes of cash flow problems in small businesses is the failure to collect what is owed. Owners get so busy selling the products and providing services that they say they don’t have time to send out statements or invoices to customers. If you don’t invoice them, they won’t pay you! Many entrepreneurs train their customers not to pay on time by failing to follow-up when a payment is late. When a bill is even one day overdue, someone needs to call that customer with a friendly reminder that you expect to be paid. Accounts receivable days is a key metric that has profound effects on cash flow and should be monitored very closely. Learn what the average is for your industry and how your number of days to collect payment compares. Use an accounts receivable aging report.
- Failure to manage inventory. Inventory is an asset that if not managed can kill a business. Often business owners buy too much of the wrong inventory and let it sit on the shelf gathering dust. This ties up the cash needed to purchase what customers want. There is also a cost to storing this inventory. Failure to take frequent physical inventories will cause gross profit on the Profit & Loss Statement to be inaccurate. What you think is a profit on the bottom line could in fact be a loss. Learn what the average inventory turn number is for your industry and how you compare. If yours is a business that involves inventory, make managing this asset a top priority.
- Lack of Internal Controls. Often the business owner leaves all the financial duties to one “trusted” employee. In a small business where there are few employees it is difficult to separate duties so that one person does not have total control of transactions. The owner needs to be the one to receive the bank statement and keep control of checks. Always pay bills from an invoice, not a statement to ensure you do not pay bills twice. Do not sign blank checks. In addition to separation of duties, a good internal control system includes authorization, documentation, and reconciliation.
- No Marketing. When times get tough the first thing many businesses cut back on is marketing. This is the opposite of what they should be doing! Another marketing mistake is to spend money on marketing without keeping track of your return on investment. Whenever you get a new customer you should always ask how they heard about you. Without that information how will you know if you should renew that ad when the rep comes calling? Before spending any money on marketing, the business needs a good marketing plan that sets goals, defines the message, includes a budget, and specifies how you will measure its effectiveness.
- Misuse of Debt. In order to grow, a business needs to use debt wisely. Some owners are so afraid of debt that they can’t take advantage of opportunities to expand their business. Using high interest short term debt to fund long term assets is a mistake many business owners make. The proper use of debt is something successful entrepreneurs have learned can help grow their businesses.
- No Exit Strategy or Succession Plan. Eventually many business owners want to retire or do something else and want to sell the business. The value placed on a business depends on how profitable it is. A plan to position the business for sale frequently needs to be in place several years before it is sold. Many owners want to pass the business on to children, but have not done anything to ensure they are ready to manage the business. A plan should be in place years before the anticipated date.
(Source: Carol McDonell, SBDC Athens Office)