7 Critical Blunders in Business Finance

July 4, 2013 2:44 pm0 commentsViews: 55

2013-06-11_1655Committing mistakes in business finance can be hazardous not only to your business growth but to your very business survival.  If you start committing these business financing mistakes too often, your chance to have longer term business success will be greatly reduced.  You must, therefore, learn to understand the causes and significance of each so that you are in a better position to make wise decisions. 

 

If you are serious about growing a profitable business, learn and try to avoid these seven critical blunders in business finance.  Avoiding these mistakes is the key to your business survival.  

 

>>> Finance Blunder # 1- Poor Monthly Bookkeeping

Regardless of the size of your business, inaccurate record keeping creates all sorts of issues relating to cash flow, planning, and business decision-making.

 

While everything has a cost, bookkeeping services are cheaper compared to most other costs a business will incur.  Hence, invest on it wisely because once a bookkeeping process gets established, it becomes more cost effective.  There is no wasted effort in recording all business transactions and activities.

 

By itself, not minding your bookkeeping is one mistake that leads to committing other business mistakes.

 

>>> Finance Blunder # 2 – No Projected Cash Flow

If no meaningful bookkeeping creates a lack of knowing where your business has been, it follows that no projected cash flow creates a lack of knowing where your business is going.  Without keeping score, businesses tend to stray further and further away from their targets.  Hence, any crisis will force a change in monthly spending habits.

 

Your projected cash flow needs to be realistic. In order to have more meaningful business projections, learn to apply certain level of conservatism and provide for contingencies.

 

>>> Finance Blunder # 3 – Inadequate Working Capital  2013-07-04_1427

No amount of record keeping will help you if you don’t have enough working capital to properly operate the business.  Thus, it is very important that you have created an accurate cash flow forecast before you even start up, acquire, or expand a business.

 

Too often, the working capital component is completely ignored with the primary focus going towards capital asset investments.  When this happens, the cash flow crunch is usually felt quickly because of insufficient funds to properly manage even the normal business cycle.

 

>>> Finance Blunder # 4 – Poor Payment Management

Unless you have meaningful working capital, forecasting, and bookkeeping in place, you are likely going to have cash management problems.  As a consequence, you will need to stretch out and defer payments of expenses that have come due.  This scheme, if not properly managed, can lead to the very edge of a slippery slope.

 

If you are in this situation, find out what is causing the cash flow problem first before stretching out payments because this may only lead you to dig a deeper hole.  Consider your payment deadlines for government remittances, trade payables and credit card payments.

 

error>>> Finance Blunder # 5 – Poor Credit Management

There can be severe credit consequences to deferring payments for both short periods of time and indefinite periods of time. 

  • First, late payments of credit cards are probably the most common ways in which both businesses and individuals destroy their credit.
  • Second, bounced checks are also recorded through business credit reports and are another form of black mark.
  • Third, if you put off a payment too long, a creditor could file a legal case against you further damaging your credit.
  • Fourth, when you apply for future credit, being behind with government payments can result in an automatic turndown by many lenders.

 It can get worse.  Each time you apply for credit, credit findings are listed on your credit report.  This can cause two additional problems. 

  • Second, lenders tend to be less willing to grant credit to a business that has a multitude of findings on its credit report.

If you experience cash shortage, make sure you discuss the situation proactively with your creditors so you can negotiate repayment arrangements.  Both of you can devise a mutual agreement that you can both live with and that will not jeopardize your credit.

 

profit>>> Finance Blunder # 6 – No Recorded Profitability

For startups, the most important thing you can do from a financing point of view is get profitable as fast as possible.  Most lenders must see at least one year of profitable financial statements before they will consider lending funds based on the strength of the business.  When short term profitability is not demonstrated, business financing will be based primarily on personal credit and net worth.

 

For existing businesses, historical results need to show profitability in order to acquire additional capital.  The measurement of your ability to repay is based on the net income recorded for the business by an external auditor or third-party accredited accountant.  In most cases, businesses work with their accountants to reduce their business tax as much as possible.  In doing so, it sometimes restricts their ability to borrow especially when the resulting net income becomes insufficient to service any additional debt.

 

>>> Finance Blunder # 7 – No Financing Strategy

Your financing strategy should be able to generate these three things :

1) the financing required to support the present and future cash flows of the business,

2) the debt repayment schedule that the cash flow can service, and

3) the contingency funding necessary to address unplanned or unique business needs.

 

In principle, this sounds good but it does not tend to be well practiced.  Why?  Because most businesses think that financing is an after-the-fact event.   Only when everything else is figured out, then financing strategies will be next.  Here are some of the most common reasons : entrepreneurs are more marketing oriented, people believe financing is easy to secure when they need it, the short term impact of putting off financial issues are not as immediate as other things, and so on.

 

Regardless of the reason, the lack of a workable financing strategy is indeed an oversight.  However, a meaningful financing strategy is not likely to exist if one or more of the other six mistakes are present.  This reinforces the point that all these blunders are intertwined and when more than one is made, the effect of the negative result can become compounded.

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