Start-up companies and small businesses have always had a relatively large percentage of failures, which is the ultimate price of making poor financial decisions.
Fortunately, many of these business failures can be avoided if those managing the enterprise can keep from making some common financial mistakes.
Why Small Business Owners Often Make Bad Financial Decisions
Many people go into business for themselves having ample skills at making a business work on a day to day basis. This is often one of the chief motivations for becoming self employed by opening up a small business in the first place.
Nevertheless, too much effort is often put into the daily operation of the business, while not enough attention is paid to bookkeeping and accounting practices, which are essential to running a small business efficiently and profitably.
Even though control over external factors may not be possible, avoiding simple financial mistakes and keeping accurate records will undoubtedly benefit any small business.
Common Financial Mistakes Made by Small Business Operators
The list below includes some of the most common bad financial decisions that small business owners often make when starting out:
- Undercapitalization – many businesses start out having too little capital to weather tough times. Sometimes small businesses suffer from too much optimism when the business is prospering. This can often be caused by inflation, which leads the company to make unnecessary investments in fixed assets.
- Not Having a Bookkeeper – one of the most common mistakes made when starting a business is keeping poor records. Even though the added expense may be a burden, having a competent bookkeeper and keeping efficient records can pay for itself many times over in the long run.
- Overinvestment – many small businesses go overboard when it comes to buying inventory, especially if the business has any level of initial success. While increased inventory represents a potential source of revenue, if sales drop, the additional inventory becomes a stagnant asset. With the additional inventory, the business must sell additional sub marginal accounts. This causes the company to have to carry receivables, which can cause problems with cash flow.
- Lack of Reserves for Contingent Funding – in light of the previous financial errors, the company will inevitably lack the funding for depreciation of assets, bad debts and other contingencies. Also, the company may not be able to afford to insure against flood, fire or inclement weather which could cause considerable damage to the business and in many cases, cause the venture to go belly up.
- Other Important Factors Supporting Small Businesses
Another factor which can cause difficulties for a small business consists in failing to have or failing to follow a comprehensive business plan. Having a detailed business plan with contingencies for any eventuality could save the business in a market downturn and can help prevent bad financial decisions.
Furthermore, having enough capital at the onset is probably the most important consideration when starting a small business, especially recently.
The ability to weather difficult financial conditions with a sufficient cash flow also often makes the difference between going bust and staying in business.