The era of big corporations is slowly but surely passing as small businesses are springing up every day across the globe. Unfortunately, this also means that not every small business will succeed in the ever more competitive market, so a large number of them will be forced to place the “closed” sign in their shop window sooner or later. Their demise might have to do with the present state of affairs in the market or they were simply too bad at managing their finances. If the latter is the case, they have become victims of some of the most frequent mistakes all small businesses make at some stage of their development. The good news is that these mistakes are not completely unavoidable and there steps that you can take in order not to ruin your business. Such countermeasures are related to the various dangers of doing business that should be anticipated and prepared for in advance.
The lack of an emergency fund
Even global corporations experience hiccups in their day-to-day operations but financial troubles are more dangerous for small businesses as they don’t have huge contingency funds. In fact, some entrepreneurs become so self-confident that they don’t plan a single dollar for emergency financing. A high level of confidence in your company is one thing but thinking that “things will work out” has no place in the world of finances. Hard times will come and sooner than you expect so there must exist an emergency fund or savings account that you can withdraw money from to cover unplanned expenses. This contingency fund should be large enough to keep the business afloat for at least three months before it can financially recover. In terms of funds, this means that 10 to 20 percent of your initial investment should be set aside to form an emergency fund.
Protect yourself against scams
The first two large investments will either make or break your small business. That is why you simply cannot afford to make the mistake of trusting the wrong people. Always check their history and ask around about every new business partner. In most cases, their reputation will precede them, so you won’t have to worry but never become lenient and trust every word they say or every promise. Also, you and your employees should go through some sort of basic training about the most common types of scams so you can recognize them immediately and react by contacting the authorities. Cybersecurity is especially important nowadays, so be sure to have valid access control, use encryption, and protect against viruses and malware.
Separate personal from business accounts
The biggest advantage of small businesses and especially start-ups, is the fact they are usually centered around one person or a small group or people/employees. This can be a positive thing in terms of passion and dedication but it can turn out to be a problem in terms of professionalism. Entrepreneurs often mix their careers with their personal lives which is a potential source for the financial demise of a small business. For instance, if you mix the company account with your personal savings account, then you are running the risk of getting in trouble with the law. Having a special account with a credit card is necessary for any limited company, so open one in a bank of your choice the first day you start doing business. It’s not only the authorities that you have to worry about but if you mix accounts how can you plan future costs or sum up a period? If there are two very different accounts it would be impossible to get any exact data and your company’s real balance sheet will be in the dark.
A huge number of small businesses are involved in retail and this is the area most susceptible to chargebacks. They can be frustrating because they leave you powerless since you are just collateral damage in a confrontation between your (potential) client and their bank. Chargebacks cannot be avoided entirely but their total number can be significantly reduced if you hire any of the agencies that promise to prevent chargebacks from occurring. A huge number of chargeback you stall the growth of your business as they trap both the merchandise and the money at the same time, keeping your hands tied.
There must exist a budget
It might seem as stating the obvious but you would be surprised with the number of small businesses who think they don’t need a budget. This is the worst possible conclusion any business owner can make, as planning a budget is absolutely necessary. The financial plan states what your payments are and when they are due, so you’ll never miss them. Furthermore, it would be impossible to plan for the future if there wasn’t a clear budget than incorporated future investments, such a rise in workers’ wages or an expansion of the company. With a realistic budget, you will know at all times who owes you money and who your creditors are. Always try to stick to the plans you made, as the budget is hard to rebalance.
A large amount of money you have to spend when starting the business might tempt you to spend even more in the future. Investment is one thing but overspending is a whole different thing. Don’t waste money on upgrades that your business simply doesn’t need, like the latest tech gizmos or super comfortable chairs. It’s easy to get carried away with clicking “buy” since you are paying online, but restrain yourself. In order to acquire luxury goods, you need to start earning millions before you can be able to afford them. Only buy things that are necessary for the business and always make purchases with the money you have. Imagine buying trendy merchandise from a bank loan that doesn’t sell well. A move like that has the potential to ruin the company for good!
One great alternative to a regular bank loan is a taking out a business line of credit which allows you to draw against a predetermined credit limit, as you need it, instead of receiving the full loan amount at one time like a term loan. The biggest advantage of a business credit line is that you only pay interest on the funds you draw
In the end, don’t panic even if you experience a financial setback or two. They are perfectly normal if you learn from them but there is no need to make any of the foolhardy mistakes listed here. They are so common that you simply must learn a lesson from the bad experiences of others.
Victoria Lim is a digital marketer and a business consultant and writer. She’s especially interested in writing about startups, marketing, and the latest business trends. Loves video games, tea, and traveling.