Now, more than ever before, more people are deciding to take a leap of faith and start a business. While that’s great news, the downside is that only about half of these businesses will actually succeed. There are several reasons businesses fail, yet money matters remain at the top of the list. Novice entrepreneurs make financial mistakes that end up being detrimental to their company. These mistakes are often so costly that it eventually leads to their demise.
If you want to be among the entrepreneurs that run a successful business for five years and then beyond, you’ll want to avoid these mistakes at all costs.
Neglecting Business Insurance
When you’re just starting out, having a tight budget is common. As such, you do the best you can to minimize your business expenses. While holding off on certain purchases until you’ve started generating a profit is a common practice, there are some expenses you don’t want to hold off on. At the top of the list is business insurance.
There are several types of insurance policies that your business should have, including property insurance, car insurance, equipment insurance, product liability insurance, and professional liability insurance. All types of insurance are designed to protect you and your company from unforeseen circumstances and provide you with financial support during those times.
If a disgruntled customer sues for poor quality or product malfunction, someone (employee or customer) slips and falls on the premises, your employees are in a car accident, or your equipment malfunctions, your business may take a financial hit that takes a considerable amount of time and funds to recover from. If the complaint or lawsuit is substantial, it could mean closing the doors to your business forever.
Not Managing Inventory
What happens when a customer wants to make a purchase, but the products they’re interested in aren’t in stock? They become disappointed, perhaps file a complaint, and take their business elsewhere. What happens if you have too many products and they’re not selling as you projected they would? You have a whole bunch of products that you have to get rid of (usually by dropping prices considerably) to keep the lights on. If either of these things happens for too long (or too often), it can cost you your reputation and your business.
Inventory management is a significant part of a company’s success. Unfortunately, small business owners often make the mistake of not investing in things like a point of sale system or custom barcodes from a label manufacturer to streamline their inventory management processes. Instead, they record incorrect data, make inaccurate forecasts, and disappoint a lot of customers along the way. All of these mistakes eventually lead to bankruptcy and the failure of the business.
Not Having a Rainy-Day Fund
Lots of novice entrepreneurs make the mistake of not setting aside money for a rainy day, because what they fail to see is that things can go wrong in the world of business. There could always be some unforeseen event that results in you having to spend lots of money. Company sales could slow down, a necessary repair at your commercial property could need to be fixed, the utility bills could be higher than normal, or a company car could breakdown requiring you to cover the repair costs out of pocket. If you don’t have any funds set aside, you’ll have to use personal funds or try to obtain a loan to cover the costs.
Using Credit Cards or Loans (Without Any Revenue)
It’s not uncommon for businesses to utilize credit cards and loans; however, new entrepreneurs take out a credit card or loan without having any real idea of how or if they’ll generate revenue to pay off the loans and charges. Going out and spending a ton of money to keep your business afloat may seem ideal at the time, but when your payments are due and you don’t have the money to cover it, this ruins your professional and sometimes personal credit.
You started this business because you saw it as an opportunity to make money doing something you love, but that doesn’t mean that things will always go according to plan. Though mistakes are to be made as you learn the ropes, financial mistakes such as those described above can lead to problems that might be the demise of your business. If you’re going to make your dream a reality, you have to implement practices and strategies to effectively manage your company finances.