Are you making these 9 common financial planning mistakes in your business?
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When it comes to starting and running a successful business, bright ideas and hard work can only get you so far. Without sound and comprehensive financial planning, you will struggle to stay afloat, especially during times when resources and cash flow are constrained.
Developing a solid financial plan will help you prepare for worst-case scenarios, maintain financial balance, and manage major changes or growth within your business. To help you create such a plan, we’ve outlined nine of the most common financial planning mistakes, along with tips on how to avoid making them.
1. Failure to plan for worst-case scenarios
Predicting the worst and hoping for the best is the first motto of financial planning. Sure, you might not experience a sudden drop in customer demand, your top performing staff might not leave the company, and your most critical suppliers might not go bankrupt… But what would happen if these things happened?
Trick : Perform a thorough risk analysis so you can plan for those worst-case scenarios and implement financial buffers and contingency plans.
2. No business continuity plan
If something were to happen to you, who would take care of the day-to-day management of your business and take care of all the necessary administrative and legal requirements.
It’s not nice to imagine leaving your family, employees, and business partners behind to take care of your business, but there are ways to make the transition as painless as possible. Gather and order relevant documents, take out adequate life insurance and create an emergency fund to keep the business going in the meantime.
Trick : Write a detailed business continuity plan to provide your loved ones with the information they will need to transfer ownership of your business. For example, they will need contact details for your accountant and lawyer and a detailed description of how you want the business to be run in the future.
3. Prioritize sales
Many new business owners get so caught up in the pressure of generating sales that they end up neglecting other equally important parts of financial planning.
Yes, making money for your business is essential, but you also need to think about how you will manage payroll, accounts receivable (AR), and product inventory.
Trick : Use cash flow forecasting models to project inflows and outflows over a defined period. This will help you make informed decisions about who to hire as well as how many people, what type of vendors you can work with, and how much inventory you can reasonably afford to buy and stock.
4. Spending too much money
When things seem to be going well for your business, it’s easy to get carried away and let your spending habits run wild. Before you know it, you’ve rented a new office space, hired five new team members, and bought a new car.
And it’s not just big purchases you need to consider. “Nice-to-have” expenses like buying coffee every morning or taking your team out to dinner can quickly add up and have a major impact on your business bottom line.
Trick : It’s not that you should never treat yourself or your employees to a morning coffee or a staff party. Don’t make the mistake of dismissing these expenses as inconsequential. Make sure all expenses are accounted for and included in your budget.
5. Taking too much
There’s a common misconception that the most dedicated and motivated new business owners “go it alone.” Do you even care about your business if you don’t work around the clock, sacrifice your personal life, and take on roles you know nothing about?
You won’t save money in the long run if you spend your days tackling financial and administrative tasks that a trained professional could do without a second thought.
Trick : Ask for help when you need it. Focus on what you’re good at and assess when it might be worth spending money on an accountant, lawyer, or similar.
6. Living paycheck to paycheck
It’s tempting to pour every penny you have into your business, but that’s not a sustainable or secure way to operate. You want to make sure you’re prepared if your circumstances change, the economy crashes, or you need to make a big purchase for your business.
Trick : Make sure you have a reserve of at least three months of expenses in your account in case something goes wrong.
7. Not raising enough money
Once you’ve found a fantastic business idea, you’ll want to get started as soon as possible. But adopting a “no time to waste” philosophy can get you in trouble later.
It’s understandable that you’re a little reluctant to sell a stake in your business to investors. But there’s also no point in opening up for business before you have enough resources to support the smooth running and efficiency of your business.
Trick : Allow time before launching your business to secure investment. Trust that it will all be worth it, giving you much-needed stability to make mistakes and try new things along the way.
8. Keep work and personal finances together
Merging your business and personal finances can make things very complicated, very quickly.
It’s nearly impossible to manage cash flow and keep accurate records of your business finances when you’re continually tapping into your business account to make personal purchases. Not only are things getting harder (not to mention time consuming) when it comes to submitting your taxes, it could also prevent you from getting a business loan.
Trick : Always open two completely separate financial accounts to ensure you are accurately tracking your spending.
9. Reduce costs instead of increasing revenue
While it is beneficial to closely monitor and reduce your organization’s operational costs, it should never come at the expense of increasing revenue. You will need to figure out how to manage your finances in a way that allows you to focus on generating maximum income.
Trick : Operate within your means, but try not to sacrifice long-term business growth opportunities in the name of lowering upfront costs.
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