These mistakes can sink your business, but they're easy to avoid.
One thing you'll hear over your lifetime as a small business owner is that there's no template for success. That is certainly true. The experience of being a business owner – and succeeding as one – is unique from company to company.
With that in mind, there are certain things that are pretty true universally. Certain mistakes can tank businesses across the board, regardless of your industry or how much experience an entrepreneur has. The following five financial mistakes that small business owners make put their companies in jeopardy. Make sure you avoid them to stay solvent and start thriving.
1. Not monitoring your business credit score.
Hopefully, by now, you know that you have a business credit score. It's a number entirely separate from your personal credit score that tells the story of your business's history with debt. Many of the factors that affect that number – your payments history, your debt utilization ratio, your length of history – are things that you have a great deal of control over.
As you scale your business, this number becomes immensely important. Not only will it help you in the future with things like securing business financing, but it's a public record too. If another business is considering extending you trade credit and your business credit score is low, they could decline to extend you net terms, or offer you less-favorable ones.
Factors like your business credit card payment history can help boost your score. Staying on top of this number – and checking it often – is key to keeping your business in the best possible standing.
2. Waiting too long to apply for financing (or taking out too much).
As long as we're talking about small business funding, let’s mention the mistake of waiting until you're in the midst of an emergency before applying for a small business loan.
There are many uses for business funding: You can use the money to seize an opportunity, bridge a cash flow gap, boost your working capital, or, of course, help you out in an emergency. The last part is the trickiest situation. Sure, you never know when disaster will strike. With that in mind, many business owners wait until the last moment to apply for funding. That generally makes loans more expensive, with higher interest rates and shorter repayment periods, which can put a big financial strain on business owners already in dire straits.
On the flipside, just because you can get a loan doesn’t mean you should. Business financing is not free: There are fees and costs associated with each loan you take out, so it’s essential that you absolutely need the money before signing on that dotted line.
One alternative is having a business credit card or a business line of credit at the ready so when you need access to funding, you're not scrambling to get an application together. Plus, you'll only pay interest on the money you actually use.
3. Not keeping a close eye on cash flow.
Which leads us right into our next point. Cash flow is one of the most consistently reliable indicators of a business's health. It gives you a sense of your survival in the short term, and through cash flow projections, you can see whether or not you'll be able to make your fixed-cost obligations, for instance.
Business owners who aren't in the weeds with their finances every day are at a major disadvantage. It's like saying, "Well, I'm alive – I don't need to know if I'm healthy, right?" Which you'd never do. Sure, you can leave the nitty-gritty paperwork to your accountant, but it's a big mistake to not understand whether or not your business is cash flow negative, or if you're getting dangerously close.
Understanding cash flow has a substantial bearing on many other elements of your business. It's a major financial mistake not to know how to read your income statement and balance sheet, both of which are directly tied to your cash flow.
4. Putting off investment in marketing, sales, and research.
It's very easy to feel like marketing is secondary. If you build it, they will come, right? Absolutely not.
Many small business owners make the mistake of pushing off investing in marketing and sales, assuming that if they build a good product, it'll sell itself. Although you might have a very sticky product once you get people on board, it's wrong to assume people will find you naturally. You have to meet people where they are and invest in customer research.
Additionally, don't assume anything – the assumptions you make about your consumer base's desires and habits might not be true. Confirm them. You didn't quit your day job just to build a cool product or service that only your friends and family know about.
To make marketing worthwhile, do some homework. Talk to other entrepreneurs and dig to find out which campaigns can give you your best marketing ROI. The world exists far beyond just Facebook ads – explore your options and pick the path that is likely to reach the customers you want.
5. Ignoring the sunk cost fallacy.
You will make some mistakes. (but not these, right?) The best thing you can do is understand that, as a small business owner, you'll put some time and money into ideas that just aren't going to work. However, you have to cut your losses.
That's the idea behind the sunk cost fallacy, an idea that because we have invested so much in something, we have to keep pursuing it, even when it's not working. It's the principle behind why a gambler who's down stays at the table, thinking he will win back his money, or why an investor keeps her money in a dwindling stock, waiting for it to go back up.
Perhaps you try a new product or offer a new service. You've spent a lot of time and money developing it, but it isn't gaining any traction. Instead of sinking more money into making it work (when it still won't), read the cues and move on. You'll wisely save yourself a lot of frustration and trouble in the end – and you will avoid a big mistake that puts many entrepreneurs out of business.
As your business grows, you'll learn many lessons. And one way to learn is from your mistakes. That said, if you can avoid mistakes – especially big ones – all the better. Knowing these five common but catastrophic pitfalls can set your business up for success.