Working Capital Financing: Common Mistakes that Hurt Your Business
Ezra Cabrera | October 4, 2019
Did you know that proper financial management is just as important as finding new customers and increasing sales? Small business owners assume many roles; they are a manager, an advertiser, a marketer, and more. But unfortunately, many of them don’t know how to properly manage finances or know when to apply for working capital financing.
Most small business owners are more focused on generating leads and serving clients rather than keeping track of finances. For this reason, many companies don’t succeed in their endeavors despite spending hours and hours working on their business. You can improve your business’ financial management by avoiding the four most common money mistakes small businesses make.
1. Excessive Spending
You need to spend money to make money, but spending too much is one of the reasons why many small businesses fail. In the first few years of operation, it makes more sense to focus your efforts on polishing your business model than it is to invest in your company.
Many new business owners want to grow their business fast, so they make the mistake of overspending; so much so that they end up buying more than what their business can sustain. Unfortunately, overspending can lead to more debt and a decrease in profit margins long before your business becomes profitable.
Investing in your business is not a bad thing, but timing is everything. Before investing, make sure to evaluate your company. Will investing in your company generate profits that you can reinvest in the long run? It’s best to start small and only expand when it’s sustainable.
2. Running a Business without a Budget or Failing to Stick to One
Creating a budget for your company is necessary to keep track of your income and expenses. You can make a weekly, monthly, quarterly, or yearly budget which will allow you to properly document your spending. Without a budget, business owners are more prone to forget due dates, tax obligations, and occasional expenses. In other cases, you may even make large purchases during slower seasons that can hurt your bottom line. You may even end up needing working capital financing or adding thousands to your credit card debt. For this reason, it’s important to have an accurate budget and be sure to stick to it religiously.
Related: 6 Practical Tips to Effectively Stick to a Business Budget
3. Wrong Pricing of Goods/Services Offered
When it comes to pricing goods and services, you can’t possibly rely on hunches. Many business owners know that pricing products and services can be daunting. If you overprice, no one’s going to buy what you’re offering. On the other hand, you won’t see an ROI if you under-price. You want a perfect balance of affordability, value for money, and ROI. To stay competitive, it’s important to know how your competitors price their goods and services.
For smaller businesses, you can track your competitor’s prices by keeping a spreadsheet. Some tools that can help you track the pricing of all related products across the internet. These tools can help you save time and money.
Keep in mind that having the lowest prices in the market is not the answer to increasing your sales. Be more creative and look for other ways to increase sales that will result in you standing out from your competition.
4. Not Applying for Working Capital Financing
There’s no harm in bootstrapping as a way to fund an initial operation. In fact, many business owners prefer to fund their business out of pocket rather than incur debt. However, almost every business owner will tell you that taking on debt is sometimes necessary for business growth.
Although bootstrapping is a great starting point, it’s not a sustainable funding solution for growing your business. Bootstrapping can only help kick-start the operation of your business but it won’t be enough to keep your small business going or growing.
Unfortunately, many small business owners don’t realize the importance of cash flow. Cash flow, or the lack thereof, can make or break your business. 82% of businesses go bankrupt because of poor cash flow management. Although taking on debt is a risk, it’s still a better option than trying to operate while lacking in cash flow.
You don’t have to borrow millions to qualify for a loan. Depending on the type of loan you’re applying for, you can borrow as little as $500 or up to $20 million or more. If you have an accurate budget, you can qualify for a loan that’s perfect for your business goals.
Related: How to Find the Best Small Business Loan for Your Company
Remedy Financial Mistakes with Working Capital Financing
What do you think would happen if you don’t have enough working capital to run your business? You won’t be able to pay your expenses or worse, your business can go bankrupt. The abundance of cash flow and working capital is important for every business. But if you’re in a cash pinch, it won’t result in you having to resort to closing your business.
Making mistakes when running a business is inevitable. But it’s important to be aware of these blunders so you can avoid them.
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