The Financial Blunders of Small Business
Nine out of ten entrepreneurs never begin their careers as financial geniuses. Consider how that particular fact can adversely affect a small business, from a drop of incoming cash flow to haphazard talks with potential investors. That's why it's really important to understand the most commonly made mistakes new businesses make and how you can avoid them.
Have the courage to ask for help
Most new entrepreneurs never seek the help from a bank, believing it's impossible. But you have to get used to being denied for a loan, that way you're more experienced when you talk to the next financial institution. Try to schedule a meeting with a couple of bankers even if you're not applying for a loan – and bring a list of questions to ask. For example, even if you're denied, the banker you're talking to has a better grasp at your situation and is able to refer you to the right people. It's crazy how networked the banking industry is. They probably know everyone in your city or town. I advise you start with a local bank, since they have a solid history of lending to small businesses.
Be detailed about your plans
It's incredibly hard to establish a line of credit or even a small loan these days. However, too often, new entrepreneurs don't even support their cause by clearly stating their needs and what they'll use the money for. The ambiguity will frustrate bankers. You're not buying a motorcycle. Plus, entrepreneurs have a tendency to never offer projections or detailed plans in how they're going to repay the money they're borrowing. And they don't even talk about the collateral they have to back their loan request. Always outline a thorough, straight-to-the-point plan for the money you intend to acquire – equipment to manufacture product, renovating existing office space. Make sure everything is an absolute need directly related to the money you're asking for. Once you get that finished, talk about your projections and how long it's going to take to repay the loan.
Establish payment plans
Certainly, especially when you embark out in the world of business, you don't want to cut off your slow paying customers. As a result, new entrepreneurs usually brush of their terms or even reminding their customers to pay up. There's a skill when it comes to selling and then collecting what's due. You should always state your policies upfront – talking about it face-to-face and get it in writing when payment is due. This avoids any conflicts or surprises if, let's say, you drive to their office and kick in their door.
Have accounting practices in place
You have to track every penny that comes in and out of your business, from paying your employees to paying for insurance. If not, you're only guessing how much money you're actually making and possibly showing incorrect numbers to potential investors. But, as real life has it, new entrepreneurs don't face that fact. They probably watch their checking account, but they don't even think about their costs. Cash flow and turning a profit are two separate universes. Plus, new businesses don't care about taxes. Consequently, they'll experience a stressful situation when the IRS comes a knocking. Budget the cost of keeping an accountant so you stay on top of your game; you can save thousands by outsourcing the work. And put a portion of your profits in a different account to pay for the bookkeeper. That money isn't for you to cover your day-to-day costs.
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Questions and Answers
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