If you took a survey of small business owners, you would likely find a wide array of motivations for opening up shop.
The chance to be their own boss. To work in the field of their passion. To meet an unfilled need in their market.
While it may be taboo to openly aver “make money” as the top priority, there is no denying that the financial aspect is a reality. Even if money is not the main reason for your entrepreneurship, without healthy money management, small business owners will ultimately struggle to keep their doors open.
With this in mind, keep reading as we dive into a financial due diligence checklist for small business owners and explore ways to correct the most prevalent financial challenges.
Poor Cash Flow Tracking
There are all kinds of fancy metrics used to assess business health.
But when it comes to the “meat and potatoes” of core business functions, cash flow still reigns king.
Poor cash flow tracking can lead to myriad issues. Surprise shortfalls that lead to operational disruptions. Overspending and reduced creditworthiness. Missed payments that lead to strained supplier relationships. The list goes on.
At the end of the day, poor cash management undermines stability and increases the risk of insolvency.
Solution: Implement simple, consistent measures for monitoring cash inflows and outflows. Establish a weekly cash review to build financial discipline and limit the risk of oversights. Steadily build cash reserves to improve the chance of weathering turbulence. Use the latest accounting software to identify emerging trends and predict revenues.
Inadequate Risk Mitigation Planning
When it comes to business risks, mentioning COVID-19 may cause groans and eye rolls these days.
It came out of nowhere. It hit businesses hard. Move on already.
The problem is, moving on is not so easy.
More than the short-term impact of disrupted revenue streams, the macro shift in the business landscape has created financial strains that many businesses are still wrestling with. The proliferation of remote commerce. Increased (unrealistic) expectations for low-cost delivery. More stringent government regulations for health and safety.
And lest we think that COVID-19 is more of a one-off than it actually is, threats to businesses are ever-prevalent. Extreme weather events. The explosion of AI. Tighter sustainability expectations. GLP-1 medications in the food industry.
Without ongoing assessment of business risks and an effective mitigation plan, the financial strain on small businesses, should these risks manifest themselves into a crisis, may be catastrophic.
Solution: Perform periodic risk assessments. Consider both internal and external threats and determine how they may undermine the business, both operationally and financially. Use those risks with the highest likelihood and potential impact to guide protective measures. Build contingency plans. Secure adequate insurance. Diversify suppliers. Invest in technology and cybersecurity innovation.
Underpricing Products and Services
In an economy where inflation rears its head at every turn, it can be awfully tempting to assume that being the low-cost option is the path to business success. However, while more affordable offerings may appeal to an increasingly budget-conscious consumer base, underpricing products and services can lead to financial challenges from which the business may struggle to recover. A few of the most pertinent include:
- Insufficient profit margins to meet payroll, marketing, and overhead bills
- Low perception of quality
- Unrealistic consumer expectations of what your offerings should cost
Solution: Sweeping price hikes after the fact can quickly alienate clients, so it is crucial to price offerings correctly from the get-go. Find the true cost of the offering (inputs, labor, overhead, etc.) and establish your bottom-dollar profit margin. Perform exhaustive market research to gain perspective on consumer expectations and find the price they are willing to pay. Find ways to communicate value beyond price to establish client loyalty.
Mixing Business and Personal Funds
Confusion.
Oversights.
Slip-ups.
However you want to term it, the chances increase exponentially when you mix business and personal funds.
Something as simple as paying for a new keyboard for your business computer with a personal credit card can create numerous challenges. Missed tax deductions. Inaccurate financial reporting. Potential penalties.
Juggling money between personal and business accounts also obfuscates true business profitability. This may limit the ability to plan for growth and make informed decisions for the business.
Solution: Open separate bank and credit card accounts for the business. All revenue needs to be deposited in the business account. Only legitimate business purchases should be covered with business funds. Establish a consistent bookkeeping system. Implement a clear payroll and owner’s draw protocol for optimized cash flow tracking and financial optics.
Avoid These 4 Common Money Mistakes for Your Small Business
Whatever your motivation for going into business, strong money management must be a priority if your enterprise stands any chance of ongoing success. From poor cash flow planning to mixing business with personal funds, avoid the 4 money mistakes listed above and guarantee financial success for your small business. For more of the latest trends in entrepreneurship and small business, explore the content at Enterprise Podcast Network for additional thought leadership!
Author Bio:
Sam Willis is a freelance writer that loves sharing his knowledge and expertise in engineering, construction, and business. He lives in Atlanta, Georgia where he enjoys spending time with his wife and family in his free time. Sam’s work as a freelance writer can be found on Building Product Advisor, a construction industry resource site.
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