When researchers at Stanford University looked at what made most entrepreneurs take the leap of starting their own ventures, they discovered one common thread: the majority felt they’d hit the ceiling with their previous jobs and could not find better employment. The only option, then, was to become their own boss. Unfortunately, entrepreneurs also share a second common thread, per Stanford research: if they would have stayed at their jobs earning salaries with regular increases, they would have made more money.
Sound familiar? Indeed, most people who create their own businesses struggle quite a bit financially, and it’s not for lack of education or tenacity. They are simply geared toward the business they’re running. They know it inside and out, but don’t always know how to run the financial side of things, and that’s obvious by looking at the company’s finances.
Some of the most common errors, and how to correct them, are outlined below.
1. Failure to Separate Personal and Business Cash
Particularly in the early start-up phase, business owners have the tendency to mix their personal cash with their business finances. In a way, it kind of makes sense. After all, the owner is likely funding operations with his or her own money and collecting a trickle of income as it comes in. However, this means it’s impossible to track what the business expenses truly are, pay taxes properly, or even determine the company’s financial health. It also puts the individual’s financial health at risk if the business has a problem. Entrepreneurs can nip this in the bud early by opening up a business account and ensuring that everything is separate.
2. Failure to Schedule Paydays
Because entrepreneurs are passionate about what they do and want to see their business succeed, they often look after the business before they look after themselves. More than half of all business owners have gone without a paycheck, per data gathered by CNBC, and roughly 30 percent do so on a regular basis. This can keep a business afloat, but it leads to burnout, and oftentimes business owners wind up moving debt around to keep going, or they work another job alongside running the business, making it that much harder to get it off the ground. Even if the pay is modest, entrepreneurs should give themselves predictable income regularly, ideally bi-weekly or twice per month.
3. Doing Too Many Things Alone
In an effort to save cash, many entrepreneurs wear several hats, covering various aspects of the business. In reality, nobody is an expert at everything, and relying on yourself for multiple jobs means something somewhere isn’t getting adequate coverage. Moreover, it’s a major cause of burnout. It’s OK to not be in a position to hire a host of full-time employees, but entrepreneurs can benefit greatly by bringing in consultants to review processes and troubleshoot issues.
4. Not Analyzing Cash Flow
A US Bank survey concluded that 82 percent of small businesses fail because they don’t regularly examine their cash inflows and adjust their cash outflows accordingly. Businesses which sit in a precarious position should review their finances daily, though others may be able to get by with weekly or monthly reviews.
5. Not Automating and/ or Outsourcing
Processing reports and doing analytics manually takes a considerable amount of time. While many realize this, they’re concerned that upgrading to automation tools or outsourcing will be expensive. In many cases, the nominal fees are more than made up for by getting funds back to the business faster by identifying costly problems or by bringing in new money to the company. The key here is to research the options before jumping in and to know the costs as well as the potential savings prior to making a decision.
Consider Factoring to Improve Cash Flows and More
Invoice factoring is the process of selling invoices to a third-party vendor. Most industries take advantage of this because it puts cash already earned in the hands of the business owner faster than it otherwise would have been. It takes care of other challenges, such as billing, and gives business owners quick access to financial details, so it’s easier to stay on top of financials and the business has cash on hand to operate and grow. If it sounds like factoring could be right for you, get a free factoring quote today.