Tag Archives: business finances

7 Business Financing Mistakes to Avoid

Avoiding the top 7 business financing mistakes is a key component in business survival.

If you start committing these business financing mistakes too often, you will greatly reduce any chance you have for longer term business success.

The key is to understand the causes and significance of each so that you are able to make better decisions.

>>> Business Financing Mistakes (1) – No Monthly Bookkeeping.

Regardless of the size of your business, inaccurate record keeping creates all sorts of issues relating to cash flow, planning, and business decision making.

While everything has a cost, bookkeeping services are dirt cheap compared to most other costs a business will incur.

And once a bookkeeping process gets established, the cost usually goes down or becomes more cost effective as there is no wasted effort in recording all the business activity.

By itself, this one mistake tends to lead to all the others in one way or another and should be avoided at all costs.

>>> Business Financing Mistakes (2) – No Projected Cash Flow.

No meaningful bookkeeping creates a lack of knowing where you’ve been. No projected cash flow creates a lack of knowing where you’re going. 

Without keeping score, businesses tend to stray further and further away from their targets and wait for a crisis that forces a change in monthly spending habits.

Even if you have a projected cash flow, it needs to be realistic.

A certain level of conservatism needs to be present, or it will become meaningless in noticeably short order.

>>> Business Financing Mistakes (3) – Inadequate Working Capital

No amount of record keeping will help you if you do not have enough working capital to properly operate the business.

That is why it’s important to accurately create a cash flow forecast before you even start up, acquire, or expand a business.

Too often the working capital component is completely ignored with the primary focus going towards capital asset investments.

When this happens, the cash flow crunch is usually felt quickly as there is insufficient funds to effectively manage through the normal sales cycle.

>>> Business Financing Mistakes (4) – Poor Payment Management.

Unless you have meaningful working capital, forecasting, and bookkeeping in place, you are likely going to have cash management problems.

The result is the need to stretch out and defer payments that have come due.

This can be the very edge of the slippery slope.

I mean, if you don’t find out what’s causing the cash flow problem in the first place, stretching out payments may only help you dig a deeper hole.

The primary targets are government remittances, trade payables, and credit card payments.

>>> Business Financing Mistakes (5) – Poor Credit Management

There can be severe credit consequences to deferring payments for both short periods of time and indefinite periods of time.

First, late payments of credit cards are probably the most common ways in which both businesses and individuals destroy their credit. 

Second, NSF checks are also recorded through business credit reports and are another form of black mark.

Third, if you put off a payment too long, a creditor could file a judgement against you further damaging your credit.

Fourth, when you apply for future credit, being behind with government payments can result in an automatic turndown by many lenders.

It gets worse.

Each time you apply for credit, credit inquiries are listed on your credit report. 

This can cause two additional problems. 

First, multiple inquiries can reduce you overall credit rating or score. 

Second, lenders tend to be less willing to grant credit to a business that has a multitude of inquiries on its credit report.

If you do get into situations where you’re short cash for a finite period of time, make sure you proactively discuss the situation with your creditors and negotiate repayment arrangements that you can both live with and that won’t jeopardize your credit.

>>> Business Financing Mistakes (6) – No Recorded Profitability

For startups, the most important thing you can do from a financing point of view is get profitable as fast as possible.

Most lenders must see at least one year of profitable financial statements before they will consider lending funds based on the strength of the business.

Before short term profitability is demonstrated, business financing is based primary on personal credit and net worth.

For existing businesses, historical results need to show profitability to acquire additional capital.

The measurement of this ability to repay is based on the net income recorded for the business by a third-party accredited accountant.

In many cases, businesses work with their accountants to reduce business tax as much as possible but also destroy or restrict their ability to borrow in the process when the business net income is insufficient to service any additional debt.

>>> Business Financing Mistakes (7) – No Financing Strategy

A proper financing strategy creates 1) the financing required to support the present and future cash flows of the business, 2) the debt repayment schedule that the cash flow can service, and 3) the contingency funding necessary to address unplanned or unique business needs.

This sounds good in principle but does not tend to be well practiced.

Why?

Because financing is largely an unplanned and after the fact event.

It seems once everything else is figured out, then a business will try to locate financing.

There are many reasons for this including: entrepreneurs are more marketing oriented, people believe financing is easy to secure when they need it, the short term impact of putting off financial issues are not as immediate as other things, and so on.

Regardless of the reason, the lack of a workable financing strategy is indeed a mistake.

However, a meaningful financing strategy is not likely to exist if one or more of the other 6 mistakes are present.

This reinforces the point that all mistakes listed are intertwined and when more than one is made, the effect of the negative result can become compounded.

10 Easy Ways To Organize Your Business Finances

Whether you are a new entrepreneur or a more experienced business owner, taking control of your finances can feel like a part-time job. Some simple tips can help you streamline your time, organize your finances and reduce the stress of business money matters.

  1. Keep Your Bills in One Place

When the mail comes, make sure it goes in one place. Misplaced bills can be the cause of unwanted late fees and can damage your credit rating. Whether it’s a drawer, a box, or a file, be consistent. Size is also important. If you get a lot of mail, use an area that won’t get filled up too quickly.

  1. Pay Your Bills on Schedule

Bill paying can be simplified if it’s done at scheduled times during the month. Depending on how many bills you receive, you can establish set times each month when none of your bills will be late. If you’re paying bills as you receive them, chances are you’re spending too much time in front of the checkbook. Although bills may state “Payable Upon Receipt”, there’s always a grace period. Call the creditor to find out when they need to receive payment before the bill is considered late.

  1. Read Your Credit Card Statements

Most people take advantage of low interest credit card offers but never read their statements when paying the bill. Credit cards are notorious for using low interest as bait for new customers then switching to higher rates after a few months. Make a habit of looking at your statement carefully to see what interest rate you are paying each month and if any transaction fees have been applied. If the rate increases or a transaction fee appears on your statement, a simple call to the credit card company can oftentimes be beneficial in resolving the matter. If not, try to switch your money to a more favorable rate.

  1. Take Advantage of Automatic Payments

Most banks offer a way to automatically deduct money from your account to pay creditors. In addition, the creditors usually offer a lower interest rate when you sign up for this payment option because they get their money faster and on-time. Consider it as one fewer check to write, envelope to lick and stamp to buy. Just make sure you record the deduction when the automatic payment is scheduled or you run the risk of bouncing other checks.

  1. Computerize Your Checkbook

Using a software program is a handy way to organize your finances. Whether it’s Quicken(r), Microsoft Money(r) or another package, these easy-to-use programs make bill paying and bank reconciliation a cinch. Computer checks can be ordered almost anywhere and fit right into most printers. Once the checks are printed, all of the information is automatically recorded in your electronic checkbook. Furthermore, many banks have direct downloads into these software packages so when money is deposited or withdrawn, the transaction is entered immediately onto your computer. And, when it comes time to do taxes, it couldn’t be easier.

  1. Get Overdraft Protection

Most banks have a service where, if you run the risk of bouncing a check, the money will come from another source. For a nominal fee, the bank will link your checking account to either a savings, money market, or credit card so the embarrassment of bouncing a check will be avoided. Call or visit your bank to learn about this convenient feature.

  1. Cancel Unused Accounts

Whether it’s a credit card or bank account, write a letter requesting that the account is formally closed. Not only will this improve your credit score, it is a useful way to avoid money from being scattered all over the place. Don’t let department stores and credit card companies lure you into opening new accounts by offering favorable interest rates and purchase discounts. It’s easy for credit to get out of hand by taking advantage of every credit offer that comes your way.

  1. Consolidate Your Accounts

If you have several credit card accounts with outstanding balances, try to consolidate them into one. Be careful and check the balance transfer interest rates and one-time fees. Also, make a list of all your open Money Markets, Savings, CDs, IRAs, Mutual Funds, and other accounts to see if any consolidation can be done. Keeping your money in fewer places eliminates all of the guesswork involved and reduces errors.

  1. Establish Automatic Savings

Create a link from your checking account into a savings account that will not be touched. This can usually be done through the banks and automatic amounts will be transferred over each month. Most people will not put money into a savings account on a regular basis. They may wait until a large tax refund check arrives or some other event to actually deposit money into savings, retirement or other accounts. If you establish an automatic savings deposit every month, your accounts will begin accumulating money faster than you think.

  1. Clean up Your Files

Make sure your paid bills are organized in a filing cabinet. Keep individual files for paid bills. Go through your files at the end of each year and throw out bills and receipts no longer needed for auditing purposes. Contact your local IRS office to see how long records need to be kept for audits. Usually federal tax return audits can be done three years back but cancelled checks may need to be kept for seven. Consult the Internet for auditing and records-keeping procedures for your state or region.

(c) 2005 DebtGuru.com(r). This article may be freely distributed as long as the signature file and active link are included.

Michael G. Peterson is the Vice President of American Credit Foundation, an IRS 501 (c)(3) non-profit consumer credit counseling organization that has assisted thousands of individuals and families with their financial situations through seminars, education, counseling services, and, debt management plans. For more information, and free consumer resources visit http://www.debtguru.com.