Every year, hundreds of start-up SMEs in New Zealand fail.
There are a countless number of factors that contribute to a business venture’s demise, such as failure to understand the market, business plan problems, bad location, poor internet presence and marketing, and even expanding too fast.
But perhaps the most lethal contributor to startup failure is an inability to manage business finances correctly.
By avoiding these common financial management mistakes you can ensure your organisation doesn’t become another statistic.
1. Is the price right?
Pricing your products or services correctly is tricky business. But it’s worth investing some considered thought and time into this process because it can make all the difference between sinking or swimming.
If your price is too high no one will buy; price too low and you lose out on revenue. Develop a strong pricing strategy by assessing what your competitors charge.
2. Cash poor
It is common knowledge that entrepreneurs need a substantial amount of money to invest in the set-up of their business.
But it is often months if not more than a year before new businesses start to generate a steady income let alone make a profit. And it is during this time, if the business doesn’t have enough cash reserves to carry it through, it can fail.
3. Crippled by credit
Young businesses which haven’t secured sufficient operating cash for the initial set up are forced to turn to credit cards for the early stages of survival. However once a business is plastic dependent, it is extremely hard to get out of debt due to the high interest charges and annual fees credit cards carry.
Once a cash strapped SME is in credit card debt it’s often only a short amount of time before it is forced to close its doors. Steer clear of getting into credit card debt at all costs by ensuring you have sufficient operating capital.
4. Blurred lines
Don’t mix your personal and business finances. As a business owner, it’s tempting to blur the lines between personal and business expenses, but it is important to keep these two entities completely separate.
Maintaining a distinct separation makes it easier for accounting, budgeting and reconciling both sets of books. It is also vital to determining actual profits and losses and for evaluating the financial health of your small business. Plus it reduces your own personal liability and makes the business more credible.
5. Going unpaid
In the early stages of operation, it is not uncommon for business owners to pay themselves a very small salary or even nothing at all.
It may seem like a smart decision at the time to channel any and all profits back into the businesses, but sacrificing your own pay check could damage your personal financial good standing. And if you are not financially healthy, your business will no doubt be affected.
6. Unpaid invoices
You’ve done the work, emailed the invoice to your client with the usual payment terms and it’s now overdue. It’s a common complaint for any small business, but it shouldn’t be left to get out of control. Unpaid invoices can stifle a businesses cash flow and bring operations to a grinding halt if large invoices continue to go unpaid.
Having a healthy cash-flow is paramount to your survival and success, so you have to learn how to tackle overdue invoices and ensure you get paid. Organise your accounts receivable system, printing your payment terms on the back of every invoice, and follow a clear process in collecting payments. Make sending prompt reminders part of your business.
7. Don’t diversify
Look at successful companies you admire and chances are they started by offering just one or two things and so should you. Initially focus on what your business does best and do that one thing better than anyone else.
The typical business school of thought is to diversify and offer a wide portfolio of products so when one product dies another one will hopefully flourish. But diversifying prematurely can cripple a business.
The problem with selling too many things, especially for a young company, is that it is a massive financial investment that may not pay off because you end up watering down everything you do to the point of mediocrity and they all eventually fail.