Launching a new business is an exciting time for an entrepreneur. For success it is essential to understand and monitor your financial position. Take the time to learn good operating practices, and use financial reports to ensure you are focused on activities that build steady, reliable revenue.
Here are some mistakes you can avoid:
1. Not knowing, or miscalculating monthly cash flow/burn rate
One reason businesses fail is they are undercapitalized. This means they don’t have a cushion to cover their expenses while they develop a reliable stream of revenue. To get a handle on this, understand your business’s burn rate. This is the monthly cost to operate the business. Even if the business starts with low overhead, there are basic expenses that must be covered. What are your business’s monthly expenses? Are you paying rent? Do you have a staff? How much are your utilities? Do you have an assistant? Don’t forget vendors that must be paid monthly. Add up all the monthly costs, including supplies. For example, if you open the door to your new business, and your monthly expenses for rent, an assistant, phone, internet, utilities, and supplies is $10,000; then your burn rate is $10,000.
If you plan to seek financing or funding for the start-up, lenders will want to know the business’s burn rate.
Action: Go through your financial statements, and determine the monthly cost of operating your business.
2. Not Knowing the Cash-Zero Date
Another important measure is the cash-zero date. This refers to the date when the business will run out of cash. For example, if it is January 1, and the business has $100,000 cash-on-hand; the burn rate is $10,000, without revenue, you will be out of cash in 10 months.
Action: Determine your burn rate, and create a plan to get additional funds to support the business.
3. Seeking financing too late
Business owners may try getting by without financing. When a crisis hits, they have limited resources available, and may not qualify for a loan.
Action: Line up reliable funding options before you need them so that there are funds available to manage a crisis or other operational issues, including new opportunities.
4. Unfamiliarity with loan options; costly loans
Shop for a loan the way you would shop for other important items. Learn about the products and seek out reputable lenders. Examine the advantages and disadvantages of different loan types. Compare lenders’ rates, terms, and services. Familiarize yourself with lenders and financing products. Talk to other business owners. Ask for recommendations and referrals.
Action: Seek the best-possible funding option.
5. Failure to understand the financing process and timeline
Discuss the loan process and timing with lenders. The application process may take several weeks to months. It’s best to know the timeline up front. If you are facing a firm due date on a transaction, the funding may come too late. In this scenario, you will need to explore other sources of funding until your financing is approved.
In addition, some lenders – like Crestmark – are sometimes able to fund more quickly than traditional banks.
Action: Ask lenders to provide a timeline for the loan process, and for an estimated date the loan will be funded if the application is approved.
6) Relying on Credit Cards
Some entrepreneurs and small business owners use credit cards to cover expenses. This often occurs if they are undercapitalized, and haven’t planned for unexpected costs. While credit cards may help you through a jam, they are not a comprehensive solution for sound operations.
This option has limited advantages because of high interest charges, annual fees, and credit limits. In addition, it’s easy for small businesses to fall into a credit card trap.
Action: If it is necessary to use credit cards, seek introductory offers of zero percent interest; identify a card for business-only use; and track purchases.
Your business will have the best opportunity for success when you have sufficient capital to run it. Crestmark Bank provides funding solutions to small- and medium-sized businesses. Learn about our financial products here.