Like fuel in our car, money is necessary to make our businesses prosper. While a business does need to have as one of its primary goals the development of a customer base, no business will succeed over the long term if its customer base does not spend enough for the business to show a profit.
In fact, some business analysts suggest that one of the reasons that many businesses fail in their first or second year is because the financials of the company cannot keep up with the popularity of the company.
If you’ve made it past your first year, congratulations; that’s just the first hurdle. Here are three business-related financial problems that you will still face, and how to avoid them.
- Lax credit or receivables terms. Unless you work in a retail environment, there’s a good chance that you have some kind of credit terms set up with your customers. For the really nice customers, it’s easy to extend a little more credit and a little more credit, perhaps to the point of over-generosity. Are you too lax on your credit terms? Are you giving your customers too much time to pay or not enough incentive (in the form of late-payment interest charges)? Consider these options to help you:
- Offer prepayment specials, such as 20% off for any purchase paid in full before it’s delivered.
- Increase your interest charges on late payments.
- Offer a discount (5% to 10%) for invoices paid in less than 30 days.
- Offer a coupon for invoices paid in less than 15 days.
- Divide up payments: half up front, one quarter upon delivery, and one quarter credit.
- Undercapitalization. This is where many companies fail, and not just in their first year. If growth is meteoric but profits are fairly passive, you’re setting yourself up for an undercapitalization situation. If your business has experienced fairly aggressive growth in the recent past, you may be in danger. Consider these options to help you:
- Proactive planning should help solve the problem. Make sure that your current business plan (and all future versions) have a “just in case” contingency for too fast growth.
- Find an investor (probably a friend or relative) who can act as a pinch hitting investor, if necessary, to bail you out. Avoid using them at all costs, but it’s good to have just in case.
- Get a line of credit at the bank.
- Consider emergency options, including selling your car. Not a perfect solution but wouldn’t you rather walk than see your business fold?
- Raise your prices to stem the tide of customers.
- Expenses are too high. Of all three, this one is the easiest to miss. It can be closely tied with undercapitalization (in that it could be the cause of minimal profits in spite of fast growth). It’s easy to convince yourself that an expense is necessary when it may not be. This is one area where it is best to avoid before it gets too far. Use these solutions to help:
- Review your expenses at the end of each month. Keep an average total of all expenses as well as ordinary expenses (excluding extraordinary expenses).
- Just as you would at a corporate job, be strict and ask yourself what the business purpose of this expense is. Are you just buying a fancier stapler because you like it, when your current stapler is more than adequate?
- Continually shop around for less expensive vendors.
