According to recent statistics released by the United States Small Business Administration (SBA), small business is growing, but not many are thriving. On average, 66% survive 2 years after start-up, 49.6% after 4 years and only 39.5% after 6 years.
What is the cause of this high mortality rate? Research shows that mismanagement is the primary cause of business failure. Following are the three financial areas most commonly mismanaged by businesses headed toward trouble.
1. Poor Planning
Often entrepreneurs are so excited about the product or service they plan to market that many important financial preparations fall by the wayside.
- Debt: Just because a bank is willing to lend you the money doesn’t mean that you should necessarily borrow. Remember that a bank’s objective is to earn revenue from loan interest and not particularly to help your business make money. Borrow enough money to grow the business based on your business plan and avoid the high interest debt such as credit cards, car loans/leases or personal high interest loans.
- Cash-Flow Fluctuations: Too often businesses are not prepared to continue paying bills during cash-flow fluctuations. Most businesses will have high and low seasons. A company should have enough cash set aside to cover all business expenses for several months.
- Insurance: One preparation that is often overlooked in business planning is the need for insurance. Identify the possible pitfalls in your industry and be prepared for them. These might include loss of key individuals, lawsuits or liabilities.
2. Mismanagement of Sales
Once the company is in operation, it needs to correctly manage its margins in order to continue to grow.
- Setting Prices Too Low: The irony of pricing is that we generally assume consumers will buy the least expensive product or service. However, most businesses that start out trying to compete in their industry by setting lower prices end up not making a profit. Selling fewer units at higher prices will protect your margins and increase profits. Instead of trying to outsell the competitors with lower prices, many businesses would be better off investing more time into developing a higher quality product or service that would merit higher prices.
- Depending on Limited Sources of Revenue: Revenue streams tend to die off over time. Businesses often invest all their time into one product or service to a few customers and are not prepared when those sources start to dwindle. Spend some regular time throughout the year generating new revenue sources by finding new customers and researching and developing new products and services.
3. Mismanagement of Personnel
The final aspect of business operations that are mismanaged has to do with the hiring of employees. The hiring of employees is an investment and should be evaluated as such.
- Outsourcing versus Keeping it In-House: We often consider outsourcing an additional and perhaps unnecessary expense. However, if a company is investing time and money into non-core activities, rather than outsourcing these projects to contractors that will do it more cost-efficiently, the business is making a financial mistake. For example, a business needs to improve its computer networking as a means of running the company more effectively, but computer networking is not a core activity of the company. It would likely be more cost-efficient to hire a contract IT service that can be on-call for the company rather than the company creating an in-house IT staff. Invest time and money in the company’s core activities and outsource the non-core needs.
- Hiring Employees Too Early: Remember that revenue is not revenue until it’s actually money in the bank. Many businesses get into financial trouble when they hire employees based on projected revenue or promised revenue. In business, it is better to be realistic than optimistic.
Many of these mistakes can be avoided with proper and thorough planning as well as constant evaluation. A business advisor can also be a great asset to any business whether it is just starting up or trying to grow.
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Robert Cordray is a freelance writer and expert in business and finances. With over 20 years of business experience, Robert is now retired and hopes others can benefit from his writing. Look for online advisers and entrepreneurial group sites you can join such as Income.com that will support your business efforts and help lead your company in the direction of success.