Whatever your ambitions for your business, it’s vital that you keep your eye on the money. Remember that companies of any size (think Dick Smith) can be brought to their knees by poor financial decisions.
Here are 6 common business finance mistakes and how to avoid them.
1. Operating in the dark
When it comes to finance, information is power. It’s absolutely essential that you have a clear, accurate and above all up-to-date picture of your financial performance, and that you know exactly where your precious cash is going.
That means conducting regular – ideally monthly – analyses of your numbers, drilling down to identify which areas of your business are the most and least profitable, and where you may have excess capacity.
Without this information, it’s impossible to make effective decisions about your business or to evaluate growth opportunities as they arise.
2. Losing control of your debtors
If you extend credit to your customers, it’s crucial that you keep a close eye on their payment records, especially if you rely on a small client base. It can be hard to collect debts without damaging business relationships, but you can’t afford to lose control.
Consider factoring or engaging a debt collection agency if your debtor days ratio starts to get out of hand.
3. Over-investing in stock
You need enough stock to meet customer demands – but anything beyond that will chew straight through your working capital and leave you at risk of obsolescence. Be wary of accepting supplier discounts for bulk purchases, since the extra cost of storage can rapidly outweigh any savings.
4. Ignoring cash flow
Even if your business is profitable on paper, that doesn’t mean you can’t run into trouble. If your customers aren’t paying their debts, or your working capital is tied up in inventory, you can still find yourself unable to meet your financial obligations.
To keep your operations going you need enough cash on hand – or access to at-call credit facilities – so that you can pay your bills whenever they fall due. To achieve this, you’ll need detailed rolling cash projections, so you can spot issues ahead of time and take action to avoid defaulting on payments.
5. Wrecking your credit rating
Take your eye off the cash flow ball and this is the inevitable consequence – missing loan repayments or defaulting on your creditors can earn you black marks on your credit rating that may permanently impact your business.
Applying for credit can also earn you a notation on your credit rating, especially if your application is refused – so it’s important to avoid backing yourself into a corner where you urgently need finance and may not have time to prepare a successful application.
6. Paying too much for finance
As well as the very real risk of being refused (and damaging your credit rating in the process), applying for finance without proper planning can cost you dearly. Business funding is easier to secure these days thanks to Australia’s booming alternative finance market, but it still all comes down to risk.
A well-prepared application, backed by solid financial records, business plans and realistic cash projections, may gain you the offer of finance from a bank or traditional lender. Without those, you’ll probably need to turn to the fintech lenders, who aren’t regulated in the same way as Australia’s banks, and tend to charge much higher interest rates. They may also impose restrictive conditions that could seriously hamper your business.
Shaun McGowan from Lend says “If you go to the market in a hurry or fail to shop around and do your research, and you could end up locked into a very costly financing arrangement”.