Running a business, in any industry and of any size, is an exercise in balancing a budget. You’re managing your cash flow, trying to maximize your profits while minimizing your expenses—though not to the point that you’re sacrificing the quality of your products or services. At no point is this balance more precarious than when your business is growing—perhaps from the startup stage into what you hope will be its established form. This post will help you avoid the common mistakes that disrupt that balance.
In the growing stages of your business, expenses will increase but your profits may be a little slow in following suit. Therefore, it’s remarkably easy (and common) for growing businesses to make financial mistakes and halt their progress. In fact, according to CB Insights, running out of cash is the number two reason why small businesses fail. With that in mind, here are six financial mistakes that growing businesses need to avoid in order to succeed.
1. Mixing personal and business finances
One of the first steps a new business owner needs to take when establishing and legitimizing their venture is to separate their business and personal spending. That means acquiring a business bank account and credit card, first and foremost.
This step seems less important when you’re a sole proprietor, or run a very small business, where the occasional purchase on your personal credit card (which you legitimize by saying, “I need the points!”) feels insignificant.
But mixing your finances now will make untangling them even more complicated than it should be once your business starts to grow. Not to mention, you’ll forfeit some of the legal protections that come with forming an LLC if you “pierce the corporate veil” with a crossover purchase.
Once you establish your business, there’s no reason why you should be using personal financial tools to power your growth. Good business credit cards are an excellent financial tool in their own right—so be sure to explore them if you haven’t already.
2. Overhiring early on
Realizing that you don’t have to wear every hat and perform every task—doing the books, running your marketing campaigns, figuring out operations and logistics—can be a welcome relief to business owners once enough wiggle room (or funding) appears to make hires.
Hiring too many people too quickly, however, is a recipe for disaster. Remember that hiring an employee costs more than just their salary (and benefits, if you plan on offering those). You’ll have to invest in onboarding, training, more office space, access to software, equipment, supplies, and more.
In order to avoid this issue, the first person you should consider hiring is an accountant. Accounting software is useful and affordable, but accountants are often much more than number crunchers to small business owners—they can act as counsel and financial planners for the future.
3. Waiting to acquire financing
The need for capital is ever-present when running a business. There will never be a time when you wouldn’t like some extra funding on hand.
A common misconception about business loans and other forms of financing—lines of credit, business credit cards, etc.—is that you only use them when your business is struggling. Actually, in an ideal situation, the opposite is true: business financing is best used to take advantage of excellent opportunities, such as bulk deals on inventory or to expand to a new location, rather than to dig yourself out of a hole.
If you wait too long to acquire financing, you may not get the most affordable deal possible. Look into a line of credit (which you can keep in your back pocket in case of opportunity, or emergency) or elite business credit cards while your financials are strong, rather than when cash flow is weak.
4. Not finding a financial mentor
Mentoring is a not-so-secret weapon for small business owners. Having someone in your corner who has been through what you are going through (or are about to go through) gives you perspective and opens you up to possibilities you might not have thought of otherwise.
A whopping 92% of small business owners say that mentors have had an impact on the growth and survival of their business. In a space where the line between success and failure is thin (and shrinking all the time), this kind of impact is crucial.
You can find a mentor or counselor through a variety of programs, including SCORE, your local Small Business Development Center, Women’s Business Center, or a Veterans Business Outreach Center.
5. Racking up debt
As discussed above, there are times when taking on debt financing (via a business loan or credit card, for example) can be beneficial for your business.
What isn’t advised, however, is constantly carrying—and adding to—your credit card debt, accruing interest payments and penalties as you go.
First of all, maxing out your business credit cards will affect your credit utilization rate—an important ratio that tells lenders (if and when you apply for major funding) that you’ve already used up most of the credit available to you. This is a red flag that discourages lenders from offering you low-cost financing.
Plus, it’s just bad financial practice. Why pay more than you have to in the form of interest payments and fees?
If you expect to need a little extra financing help over the next year or so, look into a business credit card with 0% APR financing over the course of an introductory period (often ranging between 9-15 months). You won’t owe interest payments on your purchases as long as you make minimum payments—an excellent cash flow cushion. (Keep in mind that your APR will revert back to a rate that you agreed to with your issuer after the introductory period, so spend carefully.)
6. Not updating your business plan
If you started a new business, one of the first steps you likely took was putting together a business plan to help guide you in the early stages, as well as provide lenders or investors with a playbook as to how you’ll meet your goals.
When you enter the growth stage of business ownership, it’s time to update your business plan to take into account new numbers, metrics, and objectives.
Updated financial goals are particularly important, and will help you budget for new and evolving expenses, such as marketing campaigns or new hires.
Avoiding financial mishaps when running a business is, of course, easier said than done. Keep an eye out for these all-too-common mistakes that can arise when a business is growing, however, and you’ll be much better equipped to handle them.
