An alarming rate of new businesses in the United States don’t succeed; according to the SBA, only about half of all new businesses survive for over 5 years. Whether a business is overwhelmed with its initial growth, failing to reach its audience, or struggling with the work, there are many reasons a business can crumble within its first couple of years. For the half that don’t survive, over 80% of those failures are due to poor cash management. Here are some of the most common cash management mistakes that new businesses make and how to avoid them.
1. Taking on Too Much Too Soon
Entrepreneurs are ambitious people who understand that you can’t build a successful business without taking some risk. However, many entrepreneurs jump in the deep end of the risk pool before taking swimming lessons. It’s important for entrepreneurs to analyze what they actually need to prove in terms of success and sustainability, and then grow from there. Investing in extras too soon will result in distraction from your main product and service, and result in wasted money and a muddled business identity.
Avoid this mistake: Start focused and only spend money on necessary investments. You can grow once your business has earned the revenue to do so.
2. Failure to Collect
You can’t stay in business if you don’t get paid. Many new businesses are so inclined to please potential clients that they offer unaffordable (on the business’s end) deals or lax payment options. New entrepreneurs may be hesitant to “nag” clients about overdue payments, but continued failure to collect money owed will result in an unsustainable business.
Avoid this mistake: It’s important to establish firm payment policies before you sell your first product. If you already have clients with unpaid balances, look at these 3 tactful ways to get clients to pay outstanding invoices.
3. Penny-Pinching in the Wrong Areas
Entrepreneurs need to be frugal, but they also need to invest in the areas necessary for business success. Rushing the hiring process and having low standards for employment might save money in the short-term, but if it results in high turnover and shoddy labor, then it’s not worth it.
Avoid this Mistake- Hiring Example: Data entry is often an entry-level job, and rightfully so as it is easy to learn and doesn’t require high-end skills. It does, however, require attention to detail, and data entry mistakes can be costly for a new business. Putting aside a small amount of time and money to add an observed testing portion to the interview process will pay off big in the long run. It also can attract better employees, as when they know you’re willing to put aside a little money for a paid interview segment for finalists, they will know you’re ready to invest in your employees.
4. Ignorance of Accounting Concepts
Many entrepreneurs have a great idea for a product or service, but aren’t well-versed in business and finance principles. This does not have to be a bad thing if the entrepreneur takes time to educate themselves and/or hires experts in those fields to consult and assist them. If, however, the business owner tries to do everything themselves without consulting experts and doing research, their business will likely fail due to financial ignorance, policy unawareness, and other avoidable mistakes.
Avoid this Mistake: Know your strengths and weaknesses and hire people whose strengths are your weaknesses. Take time to educate yourself, even if you won’t personally be handling the paperwork side of your business. Remember, words mean different things in different contexts, so when you’re filling out business paperwork, it’s important to know what terms mean in a business and legal context.
These are just some starting points for entrepreneurs who want to avoid cash management mistakes. For more information, you can research these other keys to cash management, and of course, you can always ask advice from your local SBA representative. As a small business owner, the government provides resources to assist you in success. Take advantage of them!
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