Starting a business is hard work. It can be even harder if you’re wearing rose-colored glasses that blind you to some of the big challenges ahead — especially if you’re already struggling to make ends meet when it comes to your personal finances.
The good news is, many early business problems are common and possible to overcome. Here’s how you could approach four of the typical roadblocks that stymie many new business owners.
Mistake 1: Focusing on revenue over profit
Revenue is the total amount your company earns after selling goods or providing a service. On the other hand, profit is the total amount your company retains after paying the expenses associated with providing that good or service. Profit is your bottom line. It can be easy to look at your total sales and feel your company is in a great position, when your profit could be telling a different story.
It’s not uncommon that a company actually has promising revenue numbers but operates at a loss. You might have to spend some money before you can start turning a profit, which is why many early-stage businesses struggle to find the line between growth and profitability.
What to do instead: Even though revenue is essential for growing your business, growing at the expense of profiting isn’t sustainable for long. A lot of small businesses don’t have longevity — 51% of small businesses are less than 10 years old. If your business model is still evolving in the early stages of your business, keep in mind not to let your focus on profitably waver. It can be the difference between sinking or swimming.
Mistake 2: Not having enough cash on hand
You’ve probably heard the saying “cash is king.” Well, sometimes cliches are around for a reason, and that’s certainly the case when it comes to cash and new businesses. Cash gives you the power to overcome many roadblocks you could face as your business navigates through its early stages and beyond.
Your growing company needs to have enough cash on hand to not only pay business expenses but also pursue growth opportunities. Potential investors may also look at your cash reserves when determining the health of your company. Many business owners make the mistake of not saving enough cash early on, or not properly managing cash flow, but statistics show that companies with irregular cash flow are twice as likely to exit as those that have more predictable cash flow.
What to do instead: Even if your business is turning a profit, you will have to pay attention to cash flow to survive. To improve cash flow, reduce outstanding invoices in accounts receivable, lengthen the amount of time invoices stay in accounts payable and follow up on late accounts. If you get into the situation where you have an abundance of cash on hand, you can manage this by investing in growth opportunities.
Mistake 3: Taking on debt with less-desirable terms
You’ll likely have to take on debt to grow your business, but the terms of the debt can determine your growth trajectory. Small businesses make a number of common mistakes when it comes to debt — it’s not just the interest rate you need to pay attention to (although that’s important). Consider also the length of your loan, the flexibility on repayment terms and what you need to guarantee.
If your business is new and has no business credit, your lender might ask you to commit personal assets as security. In the event that your business defaults, you could lose personal assets in addition to your business income.
What to do instead: Remember that the Small Business Administration (SBA) offers loans to help with your financing needs. An SBA loan calculator can help you plan ahead to determine the impact these loans will have on the future of your company. Do the math: A $100,000 loan at a 10% interest rate on a five-year term will have monthly payments of $2,124.70. If you’ve taken on debt with unfavorable terms early on, you can consider refinancing your business debt with a new lender that’s a better fit for your business.
Mistake 4: Not separating your personal finances from business money
When you’re starting any type of small business, the first thing you should do is set the company up as a separate entity from your personal finances. That way, if the company experiences a bankruptcy or legal complication, you’re sheltered from negative repercussions. This is also important for tax purposes. Not only do you have to keep track of your expenses for tax purposes, but there could also be a difference in income tax rate between your personal and corporate taxes.
What to do instead: If you’re not sure how (or when) to incorporate your business or separate your business and personal finances, reach out to an accountant who has experience with small businesses. Not only will you have to register with the IRS, but you’ll also likely have to register with state and even city entities. It’s never too late to make the switch and incorporate your business, even if you feel your finances are hopelessly intertwined. Taking the step to separate your finances can set you up for continued success as your business grows.
Starting a business is exciting, but maintaining and growing your business requires you to navigate several early mistakes that often stall small business owners. If you haven’t faced these common pitfalls yet, now you know to stay alert and how to best avoid them. If you’ve already made one of these missteps, know that there is a way out.
Help your business become a success story by overcoming these challenges and rising through the ranks of new businesses to become an established force to be reckoned with.