Here at Virtual BeanCounters our main job is to keep you on track so you can work on your business instead of in your business. Part of keeping you on track is helping you avoid mistakes and today we wanted to focus on three big financial mistakes that can derail your business (or even drive it out of business).
1. Not having a business plan
There are two different schools of thought on the business plan. The traditional school of thought is that you have to have one completely written out and done before you present to investors or “start” your business. The other, the Lean Startup model made popular by Eric Ries, insists on a minimum business outline built around an MVP (minimum viable product) that you continue to pivot and refine through customer feedback. Honestly, we know business owners who have neither a traditional business plan nor the lean startup model in place. So, how do you fix that?
Sit down and write a business plan. There are dozens of resources available everywhere, including a free one from the Small Business Administration, that can help you through this process. One great cloud based resource that allows on-line collaboration is called LivePlan. Best bet for an already-established business? Set aside a weekend. Take no calls. Power through it. You’ll be done, you’ll be able to share it with your staff, and you’ll have a map encapsulating the past, present, and future of your company. You can wallow in the embarrassment of not having done this or you can take charge and move forward. We recommend the second option.
2. Being undercapitalized
You hear the statistics of X% of businesses failing in the first two years (it’s always some very high number) but so often the REASON why those businesses fail is not well known or tracked. One of the big ones we see here, as “keepers of the books,” is undercapitalization. People know they need money to start a business, and they have a vision of the money they’d like to make from the business, but they forget that in-between those sandwich halves is a filling called “working capital.” How much money do you need to cover payroll, buy supplies, make it through slow-paying customers, etc? A lot of people severely underestimate this. Whatever your estimate is – double it and you’ll be at a safe number.
There’s nothing more tragic than a growing, flourishing business that dies because of undercapitalization. It also puts you in a weak bargaining position if you need to trade away equity for rescue financing.
3. Failing to pay yourself first
Being a business owner is all about working hard for little pay so that you can work less for a lot more pay later on. Delayed gratification is not the problem for most small business owners. The problem is NO gratification whatsoever. We all know that money isn’t happiness. It can’t even buy happiness. But we do know that money is one of the biggest stressors in life, not just for small business. If you are working endless hours and sacrificing time with your loved ones and you aren’t taking anything from the business – or don’t have a reasonable ramp (1-18 months) to start taking something from the business – do you have a business? Or have you built yourself a job?
If you answered no to the first question and yes to the second, all hope is not lost. Figure out how to transition from an owned job to an owned business. And if you can’t, find an exit. Knowing when to quit often takes more courage than plowing along in a hopeless rut.
Not sure how much you can pay yourself? What your working capital should be? Not sure how to get started on the prospective financial statements part of your business plan? Give us a call or drop us an email and we’ll do our best to help!