Small businesses are the lifeblood of any nation, but just 40% are profitable. Of the remaining 60%, half of these break even while the rest are always in the red. With so many firms running at a loss, it’s not surprising to hear just 9% will survive a decade. Make sure your business beats the odds by learning the major financial mistakes small businesses make, and how to avoid them.
Neglecting Cash Flow
You can do plenty of work on the books and still fail if the money isn’t coming in. Ensure you send out invoices promptly and insist they’re paid on time. It can be embarrassing to chase your clients for payments, particularly if you’re emotionally invested in them, but it’s essential for the financial health of any business.
Set clear payment expectations in written contracts, and reinforce these terms when you send the invoice. Keep an eye on your unpaid invoices, and follow-up with them in a timely fashion to show late payments aren’t acceptable. Think carefully before extending credit or altering your payment terms for each client, and refuse to do business with anyone who repeatedly delays payment.
Mis-managing Business Growth
One of the founders of the Blue Man Group explained at an American Express OPEN Forum, “everyone talks about growing the business, but what you don’t hear enough about is the importance of not growing the business too fast.” This comment is relevant whether you’re managing a unique entertainment act, a carpentry firm, or a small business in between.
Big business ideas are important, but implementing them brings new challenges. Ensure you grow your business at a pace that makes professional and financial sense. A study from American Research and Development Project Startup Genome, found premature scaling, when one or more elements of the business grows out of sync with other elements, was the number one indicator of business failure. If you’re unsure of the right approach for growing your business, consider hiring a professional like Steven Spinner, business consultant.
Forgetting to Prepare for the Future
Sometimes, despite your best efforts, your business will take a hit. How you deal with the challenges your firm faces will determine whether it will be successful.
Unfortunately, businesses are sometimes sued. Small businesses can be seen as targets because many entrepreneurs prefer to settle unjustified suits rather than face costly court battles. Always acting within the law and adopting best business practices are the best way to avoid litigation.
If you still find yourself on the wrong side of the law, use funds you’ve set aside for dealing with legal challenges. Adopting professional liability insurance is another way to avoid the impact of certain lawsuits.
None of us can control the world’s financial cycles, or the way they influence spending habits. However, you can safeguard your small business from the effects of economic downturns. Build a business nest egg when the economy is strong that you can draw from when times are tough.
Making smarter financial decisions is the best way to make sure your small business enjoys success and longevity.
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