About one third of small businesses fail within the first five years. There are lots of reasons why a seemingly healthy business can go under, some of which may be outside the business owner’s control. But there are also some very common (and very avoidable) money mistakes small business owners make that contribute to their eventual demise. Here are four of the most common financial mistakes you can avoid.
#1: Over or Underpricing
Your pricing strategy can make or break you. Set your prices too high and you won’t get enough sales; too low and you might get lots of sales but end up losing money. Your industry and business type will help determine how much flexibility you have when it comes to pricing. In many retail businesses, where consumers can directly compare your products to the competitor’s, you need to keep your prices in line with the competition. Why should consumers buy something from you when they can get the same product cheaper somewhere else?
In many non-retail businesses, though, you have more flexibility in determining your prices. You want to charge enough to cover expenses and turn a profit, of course, but there are also other things to consider. For example, sometimes a higher price actually performs better than a lower one because it increases the perceived value of the product or service, whereas a lower price for the same product or service can make consumers believe it’s low-quality. Careful testing and analysis can help you decide just what to charge for your products and services.
#2: Lack of Cash Reserves
Not keeping enough cash in reserves is one of the most common small business money mistakes. Even if the costs of operating your business are low, it’s not uncommon for small businesses, especially newer ones, to experience periods of negative cash flow. Without enough money in reserves to cover operating and production costs, you can find yourself in hot water.
When determining how much cash to keep in reserves, be sure to factor in things like fluctuations in daily cash flow, unplanned events and emergencies, and potential business opportunities (in marketing or investing, for example).
#3: Relying on Credit Cards
Many small business owners rely on credit cards in order to survive the early stages of business (or the later ones!). This isn’t necessarily a mistake if you plan very carefully and keep track of your numbers, but if you don’t stay on top of your finances you can find yourself drowning in credit card debt, high interest charges, and annual fees. And if you start falling behind and missing payments, you can create a financial nightmare for yourself that you might never wake up from.
A lax company credit card policy can also get you into trouble. If you don’t have a clearly defined policy for who can use the company card and under what circumstances, things can spiral out of control quickly. Before you know it, you have unauthorized charges, recurring charges you didn’t know about for services you might not even use anymore, and general credit card chaos.
#4: Bad Record Keeping
If you don’t keep good books, you don’t have the numbers you need to monitor your business’ performance and gauge success (not to mention you can’t complete basic tasks like submitting tax returns). Without good record keeping, you can end up with mistakes in payroll, late invoicing, expense creep, and countless other problems.
Without good records, you don’t have an accurate financial picture for your business. You won’t know if you can afford to hire that new team member or pay for that equipment repair. Instead of basing your business decisions on sound financial information, you’re making assumptions and flying by the seat of your pants, and that kind of thinking can really hurt your business.
One thing these four mistakes have in common is that they’re all easily avoidable. With careful financial planning and the right systems and procedures in place, there’s no reason your business has to become another failed statistic. If accounting isn’t your forte, and you’re in good company if it’s not, then make sure you have an experienced team handling your finances. It will help you make better business decisions, grow and expand, and ultimately, succeed.
Chris Giorgio, President
Fully Accountable is a full-service accounting and bookkeeping solution that provides all the benefits of an in-house department with none of the overhead. With services like daily feedback, your own CFO, profit & loss analysis, and more, you’ll have the financial information you need to make informed, strategic decisions for your business. To learn more, visit https://fullyaccountable.com/