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7 Critical Business Financing MistakesOnce you get into business, the major challenge is staying there. If you start committing these financing mistakes too often, you will greatly reduce any chance you have for longer term business success. The key is to understand the causes and significance of each so that you're in a position to make better decisions. Business Financing Mistakes (1) - No Monthly Bookkeeping. The shoe box accounting system is not reserved just for startups. I've seen companies with sales in the millions operate without accurate monthly record keeping. Regardless of size, inaccurate record keeping creates all sorts of issues relating to cash flow, planning, and business decision making. While everything has a cost, bookkeeping services are dirt cheap compared to most other costs a business will incur. And once a bookkeeping process gets established, the cost usually goes down or becomes more cost effective as there is no wasted effort in recording all the business activity. By itself, this one mistake tends to lead to all the others in one way or another and should be avoided at all costs.> Business Financing Mistakes (2) - No Projected Cash Flow. No meaningful bookkeeping is a lack of knowing where you've been. No projected cash flow is a lack of knowing where you're going. These two should be tightly linked in that you need to track business performance against some sort of plan.<br><br> If you're off the plan, you need to make adjustments. Without keeping score, businesses tend to stray further and further away from their targets and wait for a crisis that forces a change in monthly spending habits. Even if you have a projected cash flow, it needs to be realistic. A certain level of conservatism needs to be present, or it will become meaningless in very short order. But once again, its even more meaningless if you can't measure against it. One technique to consider is to forecast your cash flow based on the best information. Then take the same information, and adjust it for what you believe is the worst case scenario for every line item. Track the actual performance between these two reports for 6 months to figure out accurate your estimates really are and adjust accordingly. Business Financing Mistakes (3) - Inadequate Working Capital No amount of record keeping will help you if you don't have enough working capital to properly operate the business. Of course you need to live within your means, but in most cases, there is a necessary amount of working capital required to properly allow the business to operate on a monthly basis. That's why its important to accurately create a cash flow forecast before you even start up, acquire, or expand a business. Too often the working capital component is completely ignored with the primary focus going towards capital asset investments. When this happens, the cash flow crunch is usually felt quickly as there is insufficient funds to properly manage through the normal sales cycle. Business Financing Mistakes (4) - Poor Payment Management. Closely linked to the first three mistakes is poor payment management. Unless you have meaningful working capital, forecasting, and bookkeeping in place, you're going to have cash management problems. The result is the need to stretch out and defer payments that have come due. This can be the very edge of the slippery slope. I mean, if you don't find out what caused the cash flow problem in the first place, stretching out payments may only help you dig a deeper hole. The primary targets are government remittances, trade payables, and credit card payments. If you push things too far with putting off remittances, government agencies can seize your bank accounts and shut you down. Even if they don't, the penalties, interest, and auditing process can finish you off. If you don't pay your suppliers on time, they can put you on C.O.D. status, or cut you off completely, compromising your ability to make sales. In many cases, the cash flow problem is an underfunded purchase and sale cycle where the underlying business is profitable, but the timing of the money coming in doesn't match up with the timing of the money going out.<br><br> In these situations, deferrals can actually solve the cash flow problem for a long period of time, but they also create new problems. Business Financing Mistakes (5) - Poor Credit Management There can be severe credit consequences to deferring payments for short periods of time or indefinate periods of time. First, late payments of credit cards are probably the most common way in which both businesses and individuals destroy their credit. If you are more than 30 days late making a credit card payment, the result is recorded on your credit bureau and it becomes a black mark with creditors. If you continue to defer making a credit card payment, all 60 day, 90 day, and 120+ day late payments are also recorded, further destroying your credit rating. Second, NSF cheques are also recorded through business credit reports and are another form of black mark. If you put off a payment too long, a creditor could file a judgement against you and further damage your credit. When you apply for future credit, being behind with government payments can result in an automatic turndown by many lenders. It gets worse. Each time you apply for credit, credit inquiries are listed on your credit report. This can cause two problems. First, multiple inquiries can reduce you overall credit rating or score. Second, lenders tend to be less willing to grant credit to a business that has a multitude of inquiries on its credit report. Your credit rating can be critical to the long term viability and growth of your business. If you do get into situations where you're short cash for a finite period of time, make sure you proatively discuss the situation with your creditors and negotiate repayment arrangements that you can both live with and that won't jeoporadize your credit. Business Financing Mistakes (6) - No Recorded Profitability For startups, the most important thing you can do from a financing point of view is get profitable as fast as possible. Lenders must see at least one year of profitable financial statements before they will consider lending funds based on the strength of the business. Before short term profitability is demonstrated, business financing is based primary on personal credit and net worth. For existing businesses, historical results need to show profitability to acquire additional capital. If you can't demonstrate the ability to generate enough cash to pay for future debt payments, its unlikely a lender will grant your loan request. The measurement of this ability to repay is based on the net income recorded for the business by a third party accredited accountant. In many cases, businesses work with their accountants to reduce business tax as much as possible but also destroy or restrict their ability to borrow in the process when the business net income is insufficient to service any additional debt. Business Financing Mistakes (7) - No Financing Strategy A proper financing strategy creates the financing required to support the cash flow, a debt repayment schedule that the cash flow can service, and contingency funding to address unplanned or unique business needs. This sounds good in principle, but does not tend to be well practiced. Why? Because financing is largely an unplanned and after the fact event. It seems when everything else is figured out, then a business will try to locate financing. There are many reasons for this including: entrepreneurs are more marketing oriented, people believe financing is easy to secure when you need it, the short term impact of putting off financial issues are not as immediate as other things, and so on. Regardless of the reason, the lack of a workable financing strategy is indeed a mistake. Not only does a good financing strategy position you for growth, but it also allows for the unexpected and unplanned. If you're in a seasonal business, a proper financing strategy can be key to surviving the low sales period, and funding the inventory and receivables for the peak sales period. However, a meaningful financing strategy is not likely to exist if one or more of the other 6 mistakes are present. This reinforces the point that all mistakes listed are intertwined and when more than one is made, the effect of the negative result can become compounded.
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