Common Financial Mistakes - Part 1
Jul 07, 2019 by Roger Scherping
This blog is part 1 of the most common financial mistakes that I’ve seen small business make in my 30 years of small business experience. Avoid these big ones and you’ll miss some potentially huge setbacks.
Mistake #1: Understand your numbers! Most people start a business because they have a passion for something. They want to meet a need in the marketplace or do some good in the world. They know their product, and they know who their customers are and how to reach them. What’s the one thing they often don’t think about? All of the financial aspects of their business! This mistake starts before you open for business. You need to understand the financial underpinnings of your business concept. How do you make money? What margins do you expect to earn? What does your monthly overhead cost you? Answer those questions first, and you will be able to answer these questions: How much profit will you make? What will your cash flow be? Will you be able to pay yourself a decent wage? Until you can answer all of these questions, you are not ready to start a business! Once you do start the business, pay as much attention to your numbers as you do to your shop floor production or your sales calls to your customers. Get regular financial reports about your business: daily sales, daily cash receipts, weekly production, monthly sales and cash receipts. These will keep you aware of what’s happening. Then get monthly financial results. Learn to understand your balance sheet, income statement, and cash flow statement. Do a 12-month projection to see where the business is going. This will make you aware of any problems that are coming down the road. Review your numbers at least once a month, and then make thoughtful decisions. Don’t make the mistake of not understanding your numbers! Mistake #2: Thinking that Profit is the same as Cash Flow! Many small business owners think that if they make a large profit one year, they are sure to have lots of cash in the bank. Sadly, this is often not true. One small business owner I know said it best: “There have been many years where I made lots of money, but I was broke.” Profit, the money your business makes, usually doesn’t equal your cash flow. The reason is that there are many ways you spend money that don’t decrease your profit. For example, making payments to a bank reduces your cash but not your profits. So does spending cash on a new piece of equipment. So does the owner taking a distribution out of the business. Even worse are the small business owners who think that if they SELL a lot, then they'll have lots of cash. Your cash flow is driven by your PROFITS, not your sales.You've got to make a profit on what you sell to have any cash flow. Don’t just think that if you make lots of sales or a good profit then cash will take care of itself. You have to pay attention to both profit and cash flow. You should be looking at both every month when you review your numbers. If you don’t, you’ll make the mistake of thinking that profit is the same as cash flow! To Be Continued in Part 2