Starting your own business is an exciting time and you should revel in the exhilarating thrill of your new possibilities. Many entrepreneurs never experience the jubilation of opening the doors to their business for the first time. If you have gotten to this point, you are doing something right. Enjoy the moment.
As exciting as the first day of operation is, it is also a time to ensure that you are putting yourself in a position to succeed. Opening the doors is one thing; keeping them open is something different altogether. According to the U.S. Small Business Administration, half of all small businesses don’t make it past the first five years. For many of those failed businesses, it is in the area of finances that they faltered the most. Learning from their errors can help you avoid similar pitfalls so that you can be in the percentage of small businesses that make it. In particular, avoid the following errors:
Lack of initial cash
Having enough money to open the doors and having enough to operate successfully may not be the same thing. Opening a business without the proper amount of capital in place can close the doors quickly. This doesn’t mean that you must have every position filled or every asset purchased. You can certainly grow a business as you evolve. You must have enough money to stick to your business plan, however. Even more importantly, you must have a substantial amount of cash reserves on hand in case business doesn’t take off quite like you anticipated.
Lack of an emergency fund
Along with have the initial cash necessary to get the business off the ground, you must also have, or immediately grow, an emergency fund. All successful companies have contingency plans and yours must be no different. Experts advise having enough emergency cash to operate your business for a minimum of two or three months. Of course, the hope is that you’ll never have to dip into this fund, but it needs to be there in case.
Avoiding (or planning for) late payments (yours or theirs)
Let’s start with theirs. Extending credit to your customers is fine, if the terms of that credit are clearly defined. You must do everything you can to build up your client base, but that doesn’t mean giving away the farm for free. Allowing customers to buy your goods/services on credit is fine, but it is recommended that you establish guidelines that require all invoices to be paid within 14-21 days. Giving customers any longer is asking for trouble. At the very least, you should avoid granting anything outside of a month.
As far as your own accounts, keeping them current is important for several reasons. First, you want to keep your credit score as high as possible, especially when starting a new business. You also want to build quality business relationships and not paying on time can prevent those from being formed. Finally, if you believe in business karma, you will understand the philosophy that believes that bills paid on time will result in invoices paid on time.
Failure to stay organized
It isn’t uncommon for entrepreneurs to be strong on vision and weak in financial acumen. You don’t need to be an accountant to run a small business, but you do need to stay organized. Whether you hire someone to do the books or take advantage of the many software programs on the market and keep them yourself, it is imperative that you stay organize. At any given time, you should know exactly where your business stands in terms of capital, accounts payable and receivable, assets, liabilities, etc.
Not separating business and personal finances
Your business and personal finances should never mix. Let me say that again, your business and personal finances should never mix. If the worse happens and your business fails, you cannot afford for that to take you down personally as well. It can be tempting to dip into the profits from time to time, but the success of your company depends on your ability to keep things separate. You should have clearly defined accounts for both your personal and your business finances. Do I need to say it again? They need to stay separate.
Not paying off debt with high APRs
Debt is usually inevitable when starting your own business. You will likely have a business credit card to two, accounts payable, and a mortgage. Not paying off those debts with high APRs, however, can prevent you from ever crawling out of that hole. Refinancing or consolidating debt are two ways to save money while maintaining your positive credit scores. Always know what interest rates you are paying on your accounts and consistently look for ways to lower them.
Not shopping around for lenders
Not all lenders are the same and if you paid attention to the point listed above, you will understand why it is important to shop around. There are other things to keep in mind as well, such as hidden fees or penalties, whether the interest is fixed or variable, and credit bureau reporting procedures. Doing your home work ahead of time can save you time, money, and heartache down the road. Don’t ever settle.
Not sticking to your business plan
The bottom line is that you need to be prepared. Develop a plan, and then follow it. It sounds easier than it is, but it is possible and important. Create a business plan that includes finances, a growth strategy, and a contingency plan and then stick to it like glue. You can adjust the plan six months or a year down the road if need be, but until then, consider it the law of the land.