Before we even start listing the top five mistakes, let’s just assume that everyone concerned has a passion to make their business succeed. And without a passion for your business, it probably won't succeed. But assuming you do have that passion, you have a high degree of success because it's an “I can” attitude, not just an “I want to” attitude - and you’re willing to put in the work and make the sacrifices necessary to make the business work. You're the one that's going to understand what has to happen each day to succeed. And you have the gut feeling each and every day to recognize and address what's top of the priority list.
Now…because you have that drive and passion, the next thing you obviously have to have is cash - and good cash reserves. In order to have good cash reserves, you need to work on a budget to know what those cash reserves will amount to. Every business is different, but whether you're running an ice cream stand or you're running a multi-million dollar business, it is a huge mistake not to prepare financially for the income fluctuations in business. You need to know what it's going to take and prepare to operate your business on a day to day basis for a minimum of 6 months. Go through the steps of your business in order to know what it actually costs in time, materials, and especially people. Determine where the money is going to come from for that cash reserve and be sure that you maintain a good line of credit. There's always a time when something won’t turn out the way that you thought it would, causing a loss. Or your business could suffer a loss due to the economy – there have been several times during my career when the economy struggled and banks actually stopped loaning money for different reasons to different industries or different sectors. You need to make sure that you have a solid foundation with lending entities and individuals you might need assistance from. Don't fool yourself into thinking that money will somehow be available if you need it. Those relationships need to be in place for your business operation.
Another common mistake about money is depending on plastic: do not use credit cards to fund your business. There's nothing wrong with running expenses through your credit card - it's a great way to track expenses and to get cash back or bonus points. But don't consider your credit cards an alternative to your bank. Compounded interest rates often create a completely different, unpleasant outcome when compared to a fixed rate loan.
Another mistake we see occurs when people mix their personal and business finances. It's tempting to cross that line and just put everything through your business - but the IRS has had a lot of practice recognizing your house payment as it runs through your business account and onto your tax return. Make sure that you maintain a good set of books to show what's going on in your business as well as outlining your personal expenses. So what’s the biggest reason for accurate bookkeeping? You want - and need - to know where and how you are making any money, where you are making the best profit.
Another mistake we see is not paying yourself. “Cash is king” and your business has to make money, but if you went to work for someone else, what benefits would you want to have? You'd want to be putting back money for your IRA and for your children's education. You’d want to be putting back money for vacations, for things that make your lifestyle better, or buying a bigger home or refurbishing the home you have. So whatever compensation you want out of your business, be sure that you're paying yourself. As business owners, our first instinct is to sacrifice income for your business. But you can't fail to pay yourself - because that's what makes it worthwhile. Obviously your business is building up a value and hopefully someday you'll sell that business. That's where the capital gains come in, where the profit comes in – that's when you really are able to look back and say wow, look at what I've built. But along the way, pay yourself. Because one day you may have to actually put money back into your business and you’ll have the ability to lend money to the business yourself.
And one final, critical mistake: After all the tough work providing quality services or products – you don’t get paid. Make sure that you have a good accounting system, a good follow up system… and stay on top of it. Hold people to the terms of your billing agreement: if you agreed to payment in full within 30 days, hold them to it. Having provided what you promised in a timely manner, there is no reason to accept less from them.
Bottom line, one of the best things you can do is make sure you're doing business with the right kind of people - the type of people that fit your business. Sometimes we look back at our business and realize we've outgrown the people that we worked with or for, maybe from a professional standpoint or just as customers. Maybe you need to move to the next level. Sit down every quarter and be honest with yourself about what's working with your business and what's not working. If you started out running a piece of equipment and one day you've got someone else running a piece of equipment, well, now you're working for a bigger company.
The best thing you can do is to be prepared to go to the next level. Every part of your business will begin to change and you need to be ready from the beginning:
- Create an accurate budget and create reserves
- Don’t fall into unwise, costly financial practices to support your business
- Keep your business and personal finances and records separate
- Pay yourself
- Stay on top of your account receivables
I hope this helps and I wish you the best of luck. I have found that learning from others and learning from mistakes can never be underestimated.