To err is human, as they say, and almost every entrepreneur will make a few financial mistakes. However, these mistakes can potentially lead to serious problems with your cash flow or credit rating. Here are a few of the more obvious pitfalls to avoid.
1 Mixing your personal and business finances
Sometimes this isn’t a matter of choice – when you launch a new business, it won’t have a credit rating, so the only way you may be able to borrow is as an individual. But once you’re up and running, it’s vital that you separate your personal and business finances for three reasons.
The first is that if the business fails and you’ve borrowed in a personal capacity, then your private assets – including your home – are potentially at risk. In other words, you could end up both jobless and homeless, and with a wrecked credit rating.
The second is slightly subtler: by borrowing as an individual, you’re ensuring that your company isn’t building its credit score, thus creating a vicious circle. Finally, it’s worth remembering that companies can generally borrow much higher amounts than individuals: typically ten to a hundred times as much.
2 Wasting your time on activities that don’t make money
Not everything you do in business will build your bottom line – it would be very unwise to ignore basic bookkeeping, for instance. However, where activities are discretionary you should focus on those that bring in new business, obtain additional orders from existing customers and build your brand via effective, targeted marketing.
3 Not paying your bills on time
When your cash flow is looking dicey, it’s tempting to pay your suppliers late. However, there’s a right way and a wrong way to do this: you should negotiate different terms of business rather than simply missing agreed deadlines.
Consistently pay your suppliers late and your credit score will suffer, making borrowing much more expensive in the future.
4 Not getting paid on time
Late-paying customers can sound the death knell for your cash flow. Whilst it’s understandable that you don’t want to upset regular clients by getting heavy-handed, once accounts start to become delinquent your odds of getting paid at all begin to deteriorate.
Make sure you keep on top of your accounts receivable and address any late payment in a friendly but firm manner.
5 Not creating an emergency fund
Even if you’ve got your cash flow all mapped out, a sudden emergency cost – failure of a key piece of equipment or unavoidable repairs to your premises, let’s say – could derail you.
Make sure you build up an emergency fund during the good times, which should represent a minimum of a month’s typical expenditure – and ideally a good deal more. Also make certain that you spend this cash cushion only in a genuine emergency.
Finally, don’t forget to talk to Cashsolv. We’re the experts in small business finance and we can help you deal with any problems that arise from your errors. Click here to discover how to make business finance work for you.