Business financing mistakes can be hazardous to not only your business growth but your very business survival.  In our overview, you will learn all about the seven critical business financing mistakes you should avoid if you’re serious about growing a profitable business. Avoiding the top 8 business financing mistakes is a crucial component of business survival. If you start committing these business financing mistakes too often, you will significantly 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. Regardless of the size of your business, 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, not having superior bookkeeping and structured recordkeeping function is a mistake that tends to lead to all the other errors in one way or another and should be avoided at all costs. You probably heard the following expressions:

What you pay for is what you get, or if you pay peanuts, you’ll get monkeys.

  Rule number one is not to take the bookkeeping function easy, with rule number two is never to hire based on price alone. Pay for value, not per hour, pay for results, not activities. Business Financing Mistakes (2) – No Projected Cash Flow. No meaningful bookkeeping creates a lack of knowing where you’ve been. No projected cash flow creates a lack of knowing where you’re going. 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. When you have a projected cash flow, it needs to be realistic, in other words, with all favourable and unfavourable events stated and scenarios explained. Don’t lie, don’t hide. Numbers don’t deceive. A certain level of conservatism needs to be present, or your intentions will become meaningless and unstructured. Business Financing Mistakes (3) – Inadequate Working Capital No amount of recordkeeping will help you if you don’t have enough working capital to operate the business properly. Honestly, when you are just starting on your own, it may look like a race against the bankruptcy. What is going to happen is either, sufficient surplus cash to finance everyday operations and progress or reductions in your capital introduced before your business kicks in. And when the cash is gone, the game is over. That’s why it’s 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 almost completely ignored with the primary focus going towards capital asset investments. When this happens, the cash flow crunch is usually felt quickly as there are insufficient funds to manage through the normal sales cycle.   Business Financing Mistakes (4) – Relaxed Receivables Management & Collections Policies Effective receivables management starts way before the invoice for completed work is raised. It all begins with the right type of clients and the type of work you deliver where profit margins would be sufficient to ensure future expansions and sustainability. The piece of wisdom is:

Pick those you will serve based on shared objectives, the value of your contribution and their ability to afford your services. Everything else would be a compromise.

  To elaborate on this even further, screening your prospects and converting them to long-term clients, serving them and contributing to their growth and prosperity is the value you provide. Your presence, expertise, contribution and professionalism enhance their position, so the only equitable compensation after you perform services and deliver your worth is to be paid as per agreed terms and on time.  Business Financing Mistakes (5) – Poor Payment Management. Unless you have meaningful working capital, forecasting, and bookkeeping in place, you are likely going to have cash management problems. The result is the need to stretch out and defer payments that have come due. To base business CF strategy on a slow payment cycle can be the very edge of the slippery slope. And you know, people and businesses are the same. You will probably receive nasty phone calls at the exact time when the cash is at its low. Like it or not, this is how the business operates nowadays. It became chronic. I mean, if you don’t find out what’s causing 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. Piece of wisdom here because it may help you immensely:

If your business is leaking cash, no amount of external funding will solve your problems. Payday will come eventually.

Business Financing Mistakes (6) – Poor Credit Management There can be severe credit consequences to deferring payments for both short periods and indefinite periods. First, late payments of credit cards are probably the most common ways in which both businesses and individuals destroy their credit. Second, bounced checks are also recorded through business credit reports and are another form of the black mark on your credit rating. Third, if you put off a payment too long, a creditor could file a judgement against you further damaging your credit. Fourth, when you apply for future credit, being behind with government payments can result in an automatic turndown by many lenders. And, It may get worse. Each time you apply for credit, credit inquiries are listed on your credit report and trust me; it takes time to clear out your name. Managing credits poorly can cause two additional problems. First, multiple inquiries can reduce your 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. If you do get into situations where you’re short of cash for a finite period, make sure you proactively discuss the problem with your creditors and negotiate repayment arrangements that you can both live with, and that won’t jeopardise your credit. Business Financing Mistakes (7) – No Recorded Profitability For start-ups, the most important thing you can do from a financing point of view is to get profitable as fast as possible. Easier said than done, but your ultimate priority.  Remain positive and to demand returns ASAP, build on smaller steps, achievements and byte-sized successes – one process at a time. Most lenders must see at least one year of strong financial statements before they will consider lending funds based on the strength of the business. Before a business demonstrates short-term profitability, its financing relies primarily on the personal credit and the net worth of its founders. And let me tell you, people borrow excessively against their family assets to fund mediocre ideas and false assumptions.

Hey, business is not the dreamland. Wake up and do your numbers.

For existing businesses, historical results need to show profitability to acquire additional capital. The measurement of this ability to repay debts when they fall due and finance obligations from short and long term borrowings;  heavily rely on the net income recorded ess by a third party accredited accountant. Donald Trump, the American president and entrepreneur, said that the business is OPM, where OPM stands for other people’s money. Your ability to attract external funding depends on profitability and repetitiveness. Profit is the result and the validation that your business model generates money and creates value. Don’t limit your opportunities. 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 net business income is insufficient to service any additional debt.

Our goal is to maximise the amount of tax your business pays.

  It may sound contrarian to widely accepted opinions, but that’s the truth. We want you to maximise revenues and profits and by doing so maybe pay more tax. However, we want you to have bulletproof business strategies and profit centres established for many years to come. Business Financing Mistakes (8) – No Financing Strategy A proper financing strategy creates 1) the financing required to support the present and future cash flows of the business, 2) the debt repayment schedule that the cash flow can service, and 3) the contingency funding necessary to address unplanned or unique business needs. Sounds good in principle, but does not tend to be well practised. Why? For most SBEs financing is mainly unplanned and usually occurs after a significant unexpected event. It is far from Just in Time and rather like Just – when- I -feel like it. It seems that the focus is on everything else before the financing discussion is on the board. There are many reasons for this, but there is one that stands out.  Entrepreneurs, in general, are more marketing oriented. They believe financing is easy to secure when they need it, the short-term impact of putting off financial issues is not as immediate as other things, and so on. Regardless of the reason, the lack of a workable financing strategy is indeed a mistake. However, a meaningful financing strategy is not likely to exist if one or more of the other six mistakes are present. There could be no discussion about the financing if the business doesn’t have a clear picture of spending patterns, a clear understanding of future directions and a proper assessment of the present and future cash requirements. Strategic Cash Flow management practices reinforce the point that a proactive approach brings sanity to your business and personal world. With all the above mistakes listed correlated and the effects of their presence often unclear, the impact of the negative result can become compounded. And missed opportunities will cost you.