Five Financial Errors New Entrepreneurs Make
Easy reminders to keep your business financials in good shape
By Dean Kaplan
Do you remember getting your driver’s license? You spent months (maybe even years) waiting for the moment you could drive. You studied the book, took the tests and practiced with your parents. You were excited, but even though you’d never admit it to your parents or friends, you were also a little afraid. You knew that you knew “how” to drive, but there were situations that probably weren’t covered in the book.
Starting your own business is similar. You’ve prepared, studied, gotten a license and now you’re ready.
As excited as you are, though, you’re probably also thinking about the statistic that more than half of new businesses fail in the first five years. You’re probably wondering what you can do to make sure your business is in the other 50%.
As a business owner and commercial collection agent, I have had a front row seat to the failure of way too many businesses. Over and over again, I see five mistakes that new entrepreneurs make.
Lack of Ongoing Funding
Crowdfunding, venture capitalists, angel investors, business loans… There are a lot of ways to finance a small business. But, after an initial push, not every company can secure ongoing financing from these sources.
Small startup companies often have difficulty obtaining appropriate financing for product development, funding an expansion, or paying for marketing costs. When creating a business plan or searching for funding, it’s important to consider more than just your initial costs.
Poor Credit Practices
In the early days of starting a business, it can be so exciting to have a client that you rarely investigate their ability to pay. That’s a huge mistake.
Any time you deliver goods or services before getting paid, you are loaning someone money. Having new clients fill out a credit application allows you to check their credit worthiness. A complete credit application also provides some protection for you if the client does not pay their invoices. At a bare minimum, you should check that any contact info a potential client gives you is correct.
Failure to Plan for Failure
Imagine getting a driver’s license and never learning what to do if you have an accident. Obviously, you don’t plan on hitting a parked car or losing a tire, but it’s reassuring to know what to do if it happens. The same is true for your business.
You don’t plan on making a mistake or having a product that doesn’t live up to expectations, but your financial plan has to account for that possibility. With a small business, anything from an unexpected snowstorm to a new tax law can severely change your profit margins. If your financing doesn’t account for potential failure, you’ll almost certainly experience it.
Messy Accounting Practices
One of the main reasons people don’t pay invoices on time is because they don’t receive the invoice on time. If you are not regularly billing clients and following up on your bills, you can’t be surprised when you don’t receive payment. The longer you take to bill someone, the longer they’ll take to pay.
The longer a bill goes unpaid, the less chance you have of collecting on it. By not billing and receiving payment on time, you may be missing important clues into the financial health of your clients. There are many free and low-cost accounting programs that you can use to make sure both your accounts payable and accounts receivable stay up-to-date.
Making Payment Deals
When a client doesn’t pay their bill, it’s tempting to try and solve the problem yourself. Too often though, business owners who are not trained in negotiations or collections attempt to “make a deal” with a client that owes them money. Unfortunately, these deals do not always result in payment. Once you’ve made an offer to someone who owes you money, it is difficult to rescind that deal. If you’ve tried to negotiate with your client before sending them to collections, you may have hurt your collection agent’s chances of collecting on the full amount owed to you.
The first few years that you were driving, you probably had a few accidents. The same is likely when starting a business. Not every deal or move you make is going to turn out perfectly. But you can limit the damage you do to your business by having strong financial support and practices.
About the Author
Dean Kaplan is president of The Kaplan Group, a commercial collection agency specializing in large claims and international transactions. He has 35 years of manufacturing, international business leadership and customer service experience. Today, he provides business planning, training and consultation to a variety of global companies.