As a financial expert managing $300 million in cash flows for numerous clients, I’ve come across common mistakes that many small businesses make. These missteps can have disastrous consequences, so here are the top 5 “killers” you need to steer clear of at all costs:
1. No Bookkeeping: A Recipe for Disaster
One of the biggest mistakes is neglecting bookkeeping or attempting to handle it on your own. Both options spell trouble for your business. Instead, invest in hiring a full-time or contract bookkeeper, costing you anywhere from $200 to $2,000 per month. Knowing your accurate financial numbers is crucial; without this understanding, you’ll be flying blind.
2. Unstable Gross Margins: A Warning Sign
Gross margins reflect your ability to generate consistent cash flows. Instability in these margins can indicate flaws in your business model. It’s crucial to calculate, review, and analyze your margins regularly. Healthy and stable margins can help you avoid a host of business mistakes.
3. Unprofitable Unit Economics: A Recipe for Bankruptcy
While not every business can have high margins, it’s crucial to have sound unit economics that doesn’t rely on factors beyond your control. Unsustainable unit economics can lead your business down a path to bankruptcy. It’s essential to understand and maintain profitable unit economics to ensure long-term success.
4. No Emergency Fund: The Real-Time Cash Saver
Cash flow is one thing, but having real-time cash availability is another critical factor. Many businesses fail to keep enough cash on hand, leaving them vulnerable in emergencies such as lawsuits, natural disasters, or unexpected attrition. A wise move is to have at least six months’ worth of expenses stashed away in cash.
5. Neglecting Cash KPIs: The Silent Killer
Poor cash flow management is a leading cause of business failure. Yet, understanding your cash flows doesn’t require being a finance expert. Tracking Key Performance Indicators (KPIs) related to cash flow is essential for your business’s survival and growth.
Embrace Data-Driven Decision Making
The key to overcoming these “killers” lies in embracing data-driven decision-making. By implementing reliable bookkeeping practices and tracking essential cash KPIs, you’ll gain valuable insights into your business’s financial health. Regular reviews and course corrections based on the data will lead your business toward sustainable growth and success.
More small business owners need to be aware of these fundamental finance practices. Avoiding these “killers” and leveraging financial data to make informed decisions can be the difference between thriving and struggling in the competitive business world. Take the time to understand your business’s financial intricacies, and it will undoubtedly pay off in the long run.