Lack of money kills businesses. Poor financial management may be a factor in many business failures but poor financial planning probably plays a part in even more. Avoid these pitfalls:
Complacency
Don’t fall asleep at the wheel, don’t risk losing focus and don’t get complacent. Think things are going well? It pays to be positive but you also need to be realistic and consider worst-case scenarios at all times as well as how you will cover them. That client who until now may have been the perfect payer may just have been hit by their own non-payer (a sign of the times) which may in turn affect how and when they can pay you. A delayed payment can have a massive impact on cashflow and thus how you are able to meet your own commitments. If you don’t bank on each and every payment being made in full and on-time you actually stand a chance of being pleasantly surprised rather than disappointed, angered and panicked.
Underpricing
Don’t underprice yourself. It’s easy to get carried away and try to differentiate on price. As a small business you probably have lower overheads than bigger rivals so you might think you can undercut the competition. The problem is that not all customers differentiate solely on price – even if it is a strong factor. Ensuring you’re able to meet demand, provide decent customer service and actually having a service or product worth buying is a far better long-term approach for your business than just being the cheapest. Consider a price point, then consider what an extra 5% or 10% contingency on top of that would mean both to you and to your potential customer. Operating costs are likely to increase before they fall, so factor this in when making your calculation. Ironically, charging a little more than a lot less actually protects your brand as people understand they are paying to get a certain guaranteed level of service, etc.
Over-committing
Promises don’t pay bills. It’s not certain until it’s under contract in black and white. It’s not paid until it’s in your bank. Too often small businesses over commit making new purchases or hiring new staff on the back of what appear to be, lucrative new contracts. The problem occurs if payment of those new contracts is delayed or worse still fails to materialise to the level expected or even at all. The people expecting payments on the other commitments you have made won’t care why they can’t be paid, they will just want paying. Some negotiation may be possible but the smart solution is not to rush into new commitments on the back of brand new contracts. Let them settle, crystallise and show their value before you commit too far. Any decision you then make is also likely to be far better informed. Remember the success of your business is based on your bottom line, not the revenue you expect to generate.
Over-borrowing
Only borrow what you need. As a small business, borrowing any money can be difficult, especially from banks but just because you can doesn’t mean you should. Even when the cost of borrowing is low, there is a cost to it and unless you have a firm strategy as to how you will spend and truly invest that money, borrowing from any source should only be a last resort. The old adage “only spend what you can afford” is true in business as in your personal life. Remember borrowing is usually over a period of years rather than months, yet even the best of contracts with a customer is likely to be spoken and drafted in terms of months, when including break clauses etc. So what looks great and affordable today, may not be so appealing in six months, in that scenario do you have a plan B to be able to pay it back? Many start-ups also fall into the temptation of building up personal credit card expenses to help fund initial investment. That is the type of borrowing that can very easily become money you can’t afford to pay back. Avoid it if at all possible.
Too narrow a customer base
Spread your load and widen your appeal. Having one premier customer is great but as discussed above, every great client will go through bad times too and if you are heavily reliant on them for income that could put your business at risk. Try to create a range of revenue streams and constantly re-evaluate that and look for alternative revenue streams, just in case one of your ‘guaranteeds’ hits a snag. Consider it as if your customers are your pension investments. The markets are volatile so it pays to have lots of smaller investments to help you ride bad times as well as boost the good times.
Undervaluing yourself
Too often start-ups and small business owners fool themselves by not drawing a wage, or not drawing a realistic wage. Yes, in the short-term that may help with cashflow and get your business on a level footing but in the long-run it is a poor business practice as you will never really understand how well your business in performing. Remember, to be a success a business needs to meet all of its outgoings and at the very least break even but hopefully make a profit. If you are unrealistic with the expenses – perhaps absorbing some personally rather than running them through the business – then you can’t be realistic about the state of your business. If you are unrealistic as to the money you pay yourself, based on the hours you put in etc, then your business success assessment will never be realistic either. Pay yourself a fair wage or at least allow for it in your budgets and your business can flourish naturally and without limitations.
Running a business online can be very rewarding but it can also be very stressful and sometimes heartbreaking. Most of this stress and disaster can be avoided through simply planning and forethought. Consider these six pitfalls and work out how you will avoid them and you are on the right track to running a successful business.
