Common Small Business Mistakes To Avoid
Everyone makes mistakes, including small business owners. One way to succeed is to know what mistakes are most common and to avoid making them. Four of the most costly mistakes are made in the areas of finance and include undercapitalization, overinvesting, confusing revenue with profit, and inadequate accounting.
Undercapitalizing refers to not having enough capital to operate efficiently. This is a common business problem resulting from lack of cash flow or the inability to secure financing. New ventures often fall prey to this because they fail to adequately research start-up costs. Two good ways to avoid undercapitalizing are to have an in-depth business plan that is consistently followed and to have an accountability partner, a sort of coach, to help keep the enterprise on track.
Another concern is overinvesting. This generally occurs in the area of fixed assets. Fixed assets can include store fronts, equipment, furniture, computers, and inventory, which is the most common area of overinvestment. Having sufficient product is a vital component of success, however, having too much stock can result in financial loss. A slow sales period could make the cost of maintaining a large inventory higher than potential profits, meaning the business might have to seek outside financing. To avoid this blunder, it is essential to conduct adequate market research.
Revenue vs. Profit
Many small business operators consider revenue and profit to be the same things, but this is a mistake. Revenue refers to the amount of money generated by sales, while profit is the money earned by the company after subtracting the cost of doing business. A simplified example of the difference would be that a pizza place’s revenue is the amount of money it makes from selling whole pizzas; however, profit is the money it makes after subtracting the cost of the ingredients it took to make the pizza from the revenue earned from selling it.
A final financial mistake of small businesses is inadequate accounting. Failure to adhere to standard accounting practices can be the death of a company. In the beginning stages of operation, entrepreneurs often commit the error of trying to handle accounts payable, accounts receivable, and budgeting on their own. While most people are able to effectively manage personal finances, corporate finances are very different and require a specialized set of skills. Businesses have many types of income and expenses that are subject to various tax and income laws; therefore, it is essential for all owners to have a qualified accountant, bookkeeper, or specialist in accounts payable/receivable on staff or on retainer.
The good news is, all of these mistakes can be avoided with adequate research, a strong business plan, and the help of a financial advisor or a qualified accountant.