As a fractional CFO, I work with business owners who are great at running their companies but don’t always have the space to slow down and look around the corner. And they end up making financial mistakes because they were reacting instead of thinking ahead.
In this post, I’ll cover some costly financial mistakes I see owners make, so you can have a good idea of what not to do in your business.
Mistake 1: Short-term, high-interest loans…
These short-term, high-interest loans are becoming very common and enticing, especially if you need cash. But now you’re carrying a new loan with aggressive repayment terms.
And they can create a spiral. The interest is high (typically 20%+) and the repayment term is usually 12 months. Many of these loans pull money from you on a daily or weekly basis.
Once they get you, it’s so hard to get away from them, because they make it so easy. And if you get one of these loans, when it is paid down to 50%, the lender is reaching out to refinance and loan you more money.
Before you know it, you’re saddled with another loan, and you’re stuck in the spiral.
I’m not saying you should never get one. But with all that I’ve said here, plus the fact that the underwriting practices for these loans are nothing that a traditional bank would do, it’s best to pay them off ASAP and avoid them in the future.
Mistake 2: Not seeking advice from your accountant before getting a short-term, high-interest loan
Not to beat a dead horse, but this is worth saying…
These short-term, high-interest loans are becoming very common and more dangerous to businesses than ever before. If you’re thinking about going the route of a short-term, high-interest loan, it would be beneficial to talk that through with your accountant. This way, you can get a full picture before taking on a loan that could potentially hurt your business.
For instance, if your company has cash-flow issues and you take on a short-term, high-interest loan, it isn’t going to help your cash-flow issues. It will take care of the urgency at the moment, but it’s only going to squeeze you more in the weeks and months ahead.
It is important to understand your current cash-flow and project how the new loan payments will impact it for the term of the loan.
Mistake 3: Hiring someone too early
A lot of businesses get into financial trouble when they hire folks without having the revenue to support them.
You always need to have a clear strategy and path for recouping the money you invest in a new hire before bringing them on your team.
If you don’t have this strategy and path in place, wait before hiring.
Mistake 4: Not keeping your books updated
This can really get you. Bookkeeping is not a compliance chore; it is a decision tool. If your books aren’t up-to-date, you’re at a much greater risk of making financial mistakes.
When you reconcile your books, you’re ensuring your numbers are accurate, and you’re catching missed transactions, duplicate entries, and other errors. This means small issues don’t turn into big problems.
That’s why I typically recommend business owners review and reconcile their books at least once a month.
Mistake 5: Flying Blind without financial insight
Many business owners focus exclusively on their bank balances or their top-line revenue. This can be dangerous. Along with keeping your books updated, there also needs to be more insight into the overall health of your business.
Industry specific KPIs is one way of establishing more detailed insight. Find five core KPIs for your business and review them monthly along with your other financial statements. Link the KPIs to specific financial outcomes for your business and track the performance.
By integrating KPIs into your monthly financial review, you are allowing for more sophisticated decision making, and you will not be flying blind.
Bottom Line
These mistakes are pretty common, so don’t beat yourself up if you’ve done one or more of them. But keep them in mind, so you know what to avoid.
And if you have any questions about your business finances, or need help keeping everything buttoned up, let’s talk.
Click the Schedule a Consultation button, and we’ll go from there.