20% of businesses fail in the first year, and 96% of businesses fail in the first ten years. That’s a shocking statistic to see that only 4 out of 100 businesses make it 10 years. One of the main reasons is not due to bad business. It is due to poor financial habits. If you want to improve the chances of your business having longevity, avoid these common mistakes.
Ignoring Cash Flow
Cash flow is your businesses lifeline. If you ignore your cash flow you are asking to fail. Mismanaging cash flow can cause a domino effect of problems. Whether it’s an unpaid bill or an uncollected fee from a client it will make an impact. Also, profit doesn’t always mean success. Take Nike for example, early on in the company Nike was very profitable but almost went under due to mismanagement of cash flow. This goes along with the saying that profit is theory and cash is fact.
Another easy way for a company to go under is by not budgeting. You need to limit and avoid debt as much as possible and one of the best ways to do this is budgeting. No matter what size company you have if you fail to budget there is no way to stay on track. There are many risks such as underestimating earnings or over spending. Without a budget failure is almost inevitable.
When business is good is when companies get lazy. They don’t realize that although they have good business they must diversify and grow. If a company sits on their hands when things are going good they will quickly fall behind. Also, diversifying spreads risk, and some companies may see that as losing opportunity for reward, but that is not the case. When things are moving forward that is the most optimal time to grow.
No Back Up
Surprise expenses are inevitable. What will make the difference is being prepared. An emergency fund is crucial especially when a company is in its early years. Using credit as an emergency fund or spending your last dollar on an emergency expense is a great way to kill your business. This is why budgeting is so important because it allows you to set aside money so you do not run into this problem.
One of the worst things you can do is grow a business and wait for a problem to arise and then react. Being proactive with your business’ financials is the key to long-term success. If you’re unsure about the financial health of your company, let us help. Sign up for a free 30 minute strategy call where we can diagnose the issue in your company.
ABOUT THE AUTHOR
Rachel Scava is a lawyer and the COO of Fully Accountable, an accounting, finance and human resources full-service and software solution for small businesses. She is passionate about helping businesses grow and hire the right people on their team, she speaks at events as a Culture Expert.