How these poor financial decisions will crush your business by the end of the year
Even minor financial missteps can have a major impact on a small business. Errors in budgeting, taxes and payroll can quickly force an owner to change course or cut spending.
However, some poor financial decisions can be almost catastrophic. These choices may lead to ballooning expenses that eat into revenue and restrict cash flow — creating a budget crisis that’s nearly impossible to keep up with.
Avoiding these financial mistakes — and knowing how to recover from the occasional misstep — is one of the best ways to ensure your business stays afloat.
1. Forgetting about cash flow
A business may be doing fine on paper, with revenues that guarantee a decent or better profit margin. However, in practice, it may have significant cash flow problems — meaning you could have money next week to pay for essential resources or cover payroll, but you don’t have it right now.
If you don’t have enough cash flow, you may get caught up in a spiral of poor financial decisions. Because you don’t have enough money coming in, you may drop prices, lower spending wherever you can and avoid hiring new employees.
You may fire workers you think you can do without, or hold on to those who are underperforming because you want to avoid the costs associated with talent search.
Simple adjustments to how you spend and accept money can help improve cash flow.
Changing your pricing model or looking for vendors whose prices match your needs can help shore up your cash flow. You may be charging the same amount, but you’re instead asking customers to pay upfront or when you hit set project milestones.
These changes can ensure positive cash flow and a more steady income for your business. You will also have cash on hand when you need to pay workers, expand an ad campaign or invest in new materials.
2. Taking on too much debt
Many small-business owners who are just getting started seek loan programs or similar sources of funds rather than investors.
This strategy is great for keeping a company independent, but it can cause problems quickly. Almost any debt you take will generate regular payments you’ll need to manage.
If you’re not ready for these payments, you may quickly find you’re in the same cash flow spiral outlined in the section above.
The best way to avoid this kind of problem is by carefully managing the debt you take on. You can also search for alternative financing options for your company, like investors, crowdfunding or small-business grants.
3. Poor management of indirect spending
Your indirect spending is made up of necessary expenses that don’t directly contribute to manufacturing a product or offering a service. These costs may include office supplies, safety gear, furniture, marketing and professional services.
Typically, this is just as important as direct spending — but it can be hard to tell what is essential and how best to manage it to maximize ROI. At the same time, neglecting your indirect spending in favor of spending that more obviously makes money can quickly cause problems.
For example, a business may skimp on administrative services and marketing in favor of expanding production capacity. As a result, it may lose track of inventory or have trouble with vendor relationships. It may also find that, even though it’s produced more, there’s no new audience to buy those products.
When budgeting, it’s important to treat indirect and direct spending with equal importance. Looking at how some of the biggest businesses handle their indirect expenditures can also help.
For example, Delta Airlines saved $11 million on hotel rooms in one three-month period by consolidating resources and spending. Similar examples may help you negotiate better deals with vendors or find ways to manage your indirect spend more efficiently.
4. Not keeping to your budget
A handful of small businesses fail to budget at all, which can lead to significant problems fairly quickly. Many more companies do budget. However, when it comes time to spend on marketing or new equipment, they don’t stick to their spending goals. Maybe they’ll invest a little extra in a strategy that worked in the past or buy tools they haven’t budgeted for.
In other cases, ambitious business owners may overestimate how much money their companies will make in a given quarter. Later in the year, they may find themselves without the revenue necessary to cover their planned expenses.
Once your operating budget stops reflecting reality, businesses can run into trouble almost immediately. You may find there’s not enough money to pay for necessary expenses — like debt payments, payroll and necessary equipment upkeep. You’ll either have to scramble to boost cash flow quickly or save where you can.
This doesn’t necessarily lead to financial ruin, but it can eat up a lot of time and money. At the very least, you may need to spend a few hours handling these problems and moving money — time you could be using to engage with clients or plan business growth.
If you find that your budgets are too restrictive, it’s best to reinvent your process. Use financial data from previous quarters to better estimate revenue and expenses, so you can create a spending plan that’s easy to stick to.
5. Not getting creative with marketing
Marketing is the best way to expand your customer base and secure more sales. However, many businesses that need to grow their consumer base tend to simply invest more in the same strategies that worked in the past.
You can do more with the money you’re already spending. For example, SEO and content marketing can make a business site even more effective.
Tracking your marketing ROI will also help. If you know which of your marketing strategies and ad campaigns are providing a strong return on investment, you have a better chance of spending in a way that attracts new customers and secures more sales.
Small-business owners need to avoid these financial missteps
These are some of the most serious financial mistakes a small-business owner can make. They may quickly put you in a situation where you’re forced to cut costs and take on more work just to stay afloat.
Avoiding these mistakes is a great way to keep your company running smoothly and ensure you have the money you need to pay employees, provide quality services to customers and grow your business.
Eleanor Hecks is editor-in-chief at Designerly Magazine. She was the creative director at a digital marketing agency before becoming a full-time freelance designer. Eleanor lives in Philly with her husband and pup, Bear.