Top 4 Finance Mistakes Small Businesses Make
As boring a topic as it may be – I see way too many young entrepreneurs overlooking the importance of managing their finances when starting out! So I thought I would share the top 4 mistakes I see people making and explain how you can avoid making the same mistakes…
1) BEING DAZZLED BY THE TOP LINE
Its so easy in todays world to be dazzled by the top lines of your competitors. We see all the time headlines branded around that XYZ company has IPO’d for this amount or Jimmy Spades and Co is now worth 100$m. Its so easy to be trapped into the mindset of chasing revenue. Chasing turnover. Its ego based! Snap out of it. You’ll become a busy fool. focus on what actually makes money. Generate profit and EBITDA – don’t chase revenues! I mean loads of people can set up a 1$m business which makes no profit – you’re just a busy fool!
2) IMPULSIVE SPENDING DURING STARTUP
This one gets me riled up too! The number of kids I see setting up startups and suddenly moving into fancy London city centre offices, which lovely canteens and fancy coffee machines. None of that is necessary as a startup! Drink instant coffee for god-sake! Focus on building your business and your bottom line! That fancy headline stuff can come later! Again we get caught up in these bad practices because of the stories we hear that Google has a super campus with all these gismos or Facebook give their employees pods to sleep in! Forget that – you can worry about that when your company is at $bn – youre not there yet!
Instead what you need to do it focus on each cost – scrutinise each expense in your business. In fact this is an essential skill that you should continue to adopt even after your business has broken ground and grown substantially. But for a startup its absolutely essential. Every pound you save contributes to the ongoing growth and sustainability of your business.
3) DIVERSIFYING TOO SOON
This is another observation I’ve made. Too many young entrepreneurs, after achieving some success with their initial business idea, start to diversify too quickly! Suddenly they have some cash in their pockets, some connections and opportunities start coming their way. They then start to dig their fingers into too many pies and investments – which ultimately makes them lose focus on their bread and butter – what got them to this position. Its like Steve Jobs famously says…. focus is not saying yes to the thing you have to focus on, its saying no to the hundred other potential ideas/opportunities that arise. Focus on your bread and butter, build a sustainable business – you can spread your wings a little later! Doing it too early can really be detrimental.
4) KEEP A CASH SAFETY NET!
Lets face it guys – we hear it time and time again – cash flow is king! and its said for a reason – without managing your cash flow – you can have a business idea with immense potential but it will never see the day of light!
Its inevitable as a start up that you’ll have extreme peaks and troughs in cash flow – its gonna happen. If you do not have an eagle eye focused on your cash flow, you could run into a month where you literally do not have enough money to pay your bills and staff – you know what that means right? The game is nearly over. So make sure this is high up on your priority list. Look after your cash and juggle it as best you can to buy yourself some time!
My personal tip here would be to have a strict rule of thumb to adhere to. I personally try to keep the account balance to at least 3-4 months worth of operating costs. Some of you as you startup of course may not be able to reach such a multiple, in which case I would suggest 2 months at a minimum. But as the business grows,invest in having that buffer – it will definitely serve you well.