Fifty percent of businesses fail within the first five years. It is even worse in the first two years, with one-third of companies closing shop. While there are many reasons for their closure, a pervasive one is that they make a mistake when it comes to managing their money. Here are some errors that pop up often and how you can avoid them.
Spending Too Much
It is a fact that you need to spend money to earn money. You buy raw materials and equipment. You then pay for employees to create finished products or services. But the critical thing here is that your earnings should be higher than your spending. The mistake that many businesses make is that they spend too much. Usually, this is because they buy an expensive piece of equipment or hire the best-qualified employee. This would not be a problem if these would give a return on their investment, but sometimes the earnings are still low. This will slowly drain your company of money.
The best way to avoid this mistake is to be aware of how much you are spending. This is where fractional CFO services can be a big help. A CFO will be able to track the flow of money in a company and help decide on how much money you should be spending. A reasonable budget planned by your CFO will give you a spending limit and warn you whether your company is in danger so you can lower expenses. With enough warning, you can rein in your spending so that you have a buffer in case something goes wrong.
Not Having Reserves
Another mistake that businesses make is not to have a reserve. This is understandable. When a business starts, the focus is on growth. The result is that earning goes towards development for the future. The company’s earnings often go into investments. The trouble is that this can often leave businesses vulnerable to many things. For example, you need to make an emergency expansion or have to pay for a necessary delivery of supplies. Without the funds to pay for these emergencies, a business can miss out on a lot of opportunities.
Having a reserve also provides a necessary cushion when a business goes bad. For example, your store can’t open for several weeks, or some of your distributors are unavailable. This means weeks without any earnings. If you do not have a reserve, you won’t have money to pay for bills. This can mean bad times for your employees as you struggle to pay their salaries. The result can be a total stop to your operations.
Lacking Any Form Of Insurance
While cash reserves are great, they may not be enough for some instances. Major disasters and the like can make your business to lose resources. For example, an accident on the road can end up destroying your delivery truck and a lot of your stock. Some times, you lose much more. Unless you have some major reserves, it will be impossible to recover from incidents like these. The other way to survive is to have an insurance plan that covers various events.
There are several insurance plans out there that can provide coverage for your business. Depending on what sort of industry you are in, there are some plans that you need to take. For example, if you are a shipping company, then freight insurance is necessary. If you provide services, then liability insurance should be what you wanted. Evaluate what is on the market and only choose the best plans that would suit your needs.
Not Knowing How Well Your Performance Is
Your business competes in a market. If you are not performing better than the competition, then there is a good chance that you are losing out. Always look at how other operations perform and compare them to yours. If you see that your performance is lagging, you should then make some changes so that you can stay competitive. For example, your observations reveal that one faction is getting a better price for their raw materials. You should then look for cheaper suppliers from somewhere else or to negotiate with your supplier. This change in your cash flow should yield some great results.
It is very easy to make a mistake when it comes to running a small business. Knowing a few of the major ones will stop you from making them. This means a higher chance of success for your company in the long run.