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Business owners can’t seem to get a break—there always seems to be a new challenge to keep everything afloat. With 1 out of 5 businesses going under within their first, the reality seems even more daunting.
There are many reasons why small businesses fail, but one of the major contributors is financial mismanagement.
Understanding how finances play a critical role in whether a business succeeds or collapses can help you avoid the dangers and reach your goals. Many of these risks involve learning bad habits and keeping yourself away from them.
Here are the unhealthy financial behaviors you should never do so your business can move forward.
Lack of financial planning and forecasting
A comprehensive plan is a roadmap to success that outlines your goals and financial projections. Knowing everything you want to do means you can identify the means of achieving them without hoping that things will fall into place.
Failing to make projections on your cash flow can lead to severe financial trouble, even if your business seems profitable on paper.
Remember that demand isn’t constant, and unexpected incidents could require some spending. Furthermore, not all months are equal, and seasonal fluctuations are periods that can wreak havoc on your finances if you fail to plan.
Fortunately, accounting systems like QuickBooks and Xero can help you with financial planning. You can also take advantage of online courses and workshops to improve your financial literacy. Lastly, you can consider hiring a consultant to help you develop a financial plan tailored to your business goals. Their expertise can be precious, especially when you’re only starting.
Inadequate understanding of key financial metrics
Key financial metrics, such as profit margins, operational costs, and solvency ratios, are the gauges to determine if your business is running smoothly. Profit margins, for instance, indicate how much your products or services effectively sell. These can help you identify areas for improvement and make changes accordingly.
Another metric is your operational costs, which include rent, utilities, salaries, and the materials you need for manufacturing. Knowing where your expenses are going means proper fund allocation.
Ignoring your key metrics can result in missing some profitability opportunities. You may be selling your products at a loss or having material costs that add up and strain your finances. Avoid this habit by studying the different metrics and their implications, as each has its own performance indicators.
Inconsistent or inadequate recordkeeping
One common adage is to study history to avoid the mistakes of the past. The same holds for business. Without meticulous recordkeeping, you won’t know the strategies that worked and what didn’t. You’ll be running operations blind, and while you might accomplish a goal, it might have been a risky gamble.
Accurate and up-to-date financial records are a must for your decision-making. They provide a clear view of your business’s financial health so you can make plans.
Misplaced invoices, untracked expenses, and unidentified transactions can lead to financial confusion on where you’re allocating resources. In the same vein, missing receipts—apart from tax audit complications—can mean the risk of losing insight into your spending habits and tax deductions.
The right accounting software like QuickBooks can help you keep things in order. You can also create a set of best practices like regular data entry sessions, categorization of funds, and having a filing system for receipts and invoices within the company.
Ignoring debt management and overspending
Debt is common, but the allure of quick cash in exchange for paying it back can lead to ruinous consequences if you aren’t careful.
For instance, relying too much on credit cards can only offer short-term relief from expenses. However, it could lead to a debt spiral that saddles you with high interest rates. There’s also the matter of failing to negotiate loan terms, which could result in strict payment terms that hinder your financial flexibility.
Managing your debt is vital to slowly paying it all and turning a profit. Check all your existing dues and study your interest rates, repayment terms, and how they fit into your financial strategy.
Prioritize the high-interest ones and develop a repayment plan. It’s also beneficial to set aside a budget solely for the loan that won’t compromise day-to-day operations.
Evading the Habits
Breaking free from bad financial habits is vital for your business to thrive and grow. Neglecting to plan, keep track of metrics, and manage debt can lead to costly mistakes that can sink your company before it can earn.
Remember that being proactive in financial management allows you to make better decisions and control your expenses instead of the other way around. Explore resources online and seek expert advice for better guidance.
By making a sound financial plan, you can confidently help your business and seize the opportunities ahead!
By Christina Dela Cruz
– has over 9 years of experience in the marketing industry and over 8 years of experience in public relations. As part of JK Capital‘s Marketing Team, she oversees the advertising, content management, media relations, promotional activities and communication initiatives for the company.
Member since April, 2024
View all the articles of Christina Dela Cruz.
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