THE SINGLE smartest thing to remember about being a small business owner is to “know what you don’t know!” And although that statement sounds funny when spoken, it’s absolutely true. The dream every motivated entrepreneur wants to realize is launching his or her dream company without any hitches; financial hitches always being at the top of that list. With that in mind, just knowing and understanding that an assortment of financial pitfalls might perhaps be lying in wait will be half your battle. On the other hand, not knowing what type of pitfall they’ll be comprised of will be the big unknown. So, as long as you know their coming, you can prepare for several forthcoming and unknown scenarios.
A Vital Checklist
The best way to eliminate as many pitfalls as possible is to steer clear of a few landmines that will present themselves along the way, especially in the early stages of your existence. Here is a checklist of some potential areas of concern you may want to address as you embark on your start-up:
Establish a strong cash reserve: As critical of a decision that you could make for your small biz, building and growing a strong and readily-available stable of cash will be essential to your success. And even if your business will be relatively inexpensive to crank up, it may be several fiscal quarters (or more) before you are able to realize steady income or even profits for the company. Having an operating reserve will be your redeemer in this regard.
Plastic dependence: Some small business owners are forced to turn to credit cards and other like-sources for early-stage survival when they don’t plan properly. Whether it be through a small business loan, capital infusion by outside investors or even your own personal funding, making sure there is sufficient operating capital is as paramount as any other factor you could plan for. Credit cards carry interest charges and possible annual fees. Avoid these unnecessary debits and use your cash.
The separation of personal and business financial activity: Keeping these two entities completely separate not only makes it easier for accounting, budgeting and reconciling both sets of books, but it assists in determining your actual profits (or losses) for the small business. The bank or outside investors will want (or require) this course of action anyway.
Salary / Compensation: Throughout the early stages of your existence, it may seem like a solid decision to redistribute any and all your profits back into your small business. This is a dignified undertaking; however, not compensating yourself along the way could prevent your personal finances from maintaining its good standing. The lesson here is to find the right balance for your specific personal needs. Not budgeting early for this necessary factor can lead to a financial pitfall.
Accounts receivable management: This is always a huge challenge for small business owners. Although most of your top clients have a solid history of payment, are they lackadaisical in remunerating those funds from time-to-time? This isn’t usually a problem…unless a majority of your customers start practicing this process. The goal here is to identify this potential pitfall early and keep those incidents isolated. Allowing your best clients a longer window of re-payment is absolutely acceptable as long as whatever parameters are set are also reciprocated. Remember, setting up and implementing a collections procedure can be costly and time-consuming. If for some reason accounts receivable are abnormally operating a little slower for some reason (due to seasonal or other factors), it is nice to know you have a cash reserve to rely upon for as an emergency back-up.
Professional access: Remember the phrase “know what you don’t know” applies right here every time. As an entrepreneur, it is impossible to know the ins and outs of every legal, accounting and industry issue. Utilizing professionals in the accounting, legal, consulting and technology fields is not only recommended but advised. Doing it right may cost more initially but over the course of the long haul those decisions to outsource the knowledge and expertise of industry professionals will keep you ahead of the curve in every aspect of your growing business. Budget for these needs and avoid even more financial pitfalls that could arise from attempting to do it yourself.
Micromanaging: Read the paragraph above. Trying to do everything yourself is the abbreviated definition of micromanaging. It also prevents you from running your company at optimum levels. Trust your outsourced professionals, your employees and anyone else involved in your business affairs to do their job and you will succeed. Chances are if you chose these individuals correctly, they will do a better job than you anyhow. So, as you grow, it will be impossible to micromanage your business anyway; therefore set this tone early by budgeting for it and then sticking to it.
A Few More Things to Consider
There are countless other pitfalls that may come into play over time. The aforementioned factors tend to be the ones most first-time entrepreneurs struggle with when starting their initial businesses. Other financial pitfalls to keep mindful of would be opening too much credit early on, overinvesting too much in your business before it has proven itself, expanding too quickly, not paying attention to your financials and ledger sheets, and not staying completely organized in every aspect of your business. Surrounding yourself with a strong team of individuals internally and externally will go a long way in preventing these things from taking root and becoming a problem.
Starting a new business can be as rewarding as anything an aspiring person looking for a challenge could hope for in life. And learning about how many potential financial pitfalls there can be should never make you waver from you’re your goal of becoming a successful entrepreneur either. In fact, it should help in validating that decision by instilling another level of confidence. Navigating those unstable waters of a start-up can be half the fun. For that reason, make sure to identify and document every step of your process, with the financial pitfalls you encounter being one of those things, for future reference and success will follow.