5 Financial slip-ups that will ruin your new business

When you first started a business you probably heard all sorts of scare stories about how many new businesses fail within the first year. A lot of those statistics are plucked out of the air and maybe it isn’t quite as bad as people make out, but those first few years are still a dangerous time. Just one or two mistakes can put you in some serious trouble and if you’re not careful, you could become one of those statistics. Starting a new business is a steep learning curve and one of the things that people struggle with the most is the financial aspect. All of a sudden, you’re trying to manage the finances of a business and if you don’t know what you’re doing, you can easily go wrong. These are some of the most common financial slip-ups that new business owners make.

Underestimating the costs of running a business

When you’re trying to get some money together to start a business, you need to have a good idea of how much everything is going to cost you. Things like manufacturing products, renting an office space, paying salaries, and marketing your products are all things that you should have considered. If you haven’t, you’re in worse trouble than you realize. But even if you’ve accounted for all of those costs, a lot of new businesses run into cash flow problems because they overlook the other costs involved in running a company. Small things that you don’t consider until they come up like maintenance on the office or paying for IT repairs can easily add up. That’s why it’s important to include them in any cost estimates you’re doing. The best thing to do is overestimate by a fair amount and then keep that money aside so when these unexpected costs do inevitably pop-up, you’ll have the money there to cover.

Paying too much tax

Business tax is a big expense for all companies but it’s particularly problematic for new companies that aren’t bringing in that much revenue. Obviously, you can’t just avoid paying it completely because you’ll end up in a far worse situation but a lot of people don’t realize that they’re paying too much. Business taxes are a lot more complicated than your own tax affairs and if you aren’t filling out the paperwork correctly, you can easily end up overpaying. It’s best to get a good tax accountant to handle it for you instead. They’ll be able to avoid any mistakes and make sure that you’re only paying the minimum amount that you’re legally obliged to. This can really take the pressure off in the early days when you’re working with a limited amount of cash.

Selling too cheap

Undercutting the competition is one of the easiest ways to take their customers and make a lot of sales very quickly. But it only works if you can actually make money. Taking a loss on a product isn’t always a bad thing if you’re selling high volumes and you’ve got a large profit margin on some of your other products. What a lot of new companies end up doing is selling at a loss so they can build a customer base and then increase their prices so they can start making a profit. The thing is, those customers came to you over your competitors because of the price. As soon as you bump the price up again, what’s stopping them from going elsewhere again? If you’re selling a good quality product, you can afford to raise your prices a little bit. The key to pricing competitively is finding a balance; you need to be selling for enough money to make a profit but still lower than competitors if you can.

Poor inventory

Not having products in stock when customers want them is a cardinal sin. When they’ve got so much choice online, they’re not going to wait around until you order more in. If they try to buy something and you don’t have it, they’ll just go elsewhere. This often leads to over-ordering, which is just as bad when you’re a new company. If you’re spending loads of money on inventory that you aren’t selling, you’re wasting cash that you desperately need to carry on operating. You’ve also got to consider the storage costs of all of that stuff. Overspending on inventory can easily lead to cash flow problems so you need to have a good inventory system in place. You should be monitoring it at all times and ordering things when they start to get low so you’ve always got roughly the same amount of stock. You also need to pay attention to which products are selling fastest and consider ordering more of those so you don’t risk running out. It might take a couple of months to find a good balance but, as long as you keep on top of it, you shouldn’t run into any problems.

Not monitoring cash flow

Most of the problems in this article relate to cash flow because that’s the most important thing for a new business but a surprising amount of new companies fail to monitor it properly. If you don’t know how much you’re spending each month and how much you’re bringing in, you won’t know if there is a problem until it’s too late. You also won’t be able to identify areas where you’re overspending which is key to managing your cash flow. If you haven’t already, you need to employ a good accountant and get them to give you regular reports on your cash flow. There are also some great online tools you can use to help you out. Microsoft Office does have some money management tools but they only have basic functions. The Google Docs spreadsheet is a little better but, again, these free ones might not be as advanced as you need them to be. It might be worth using a paid service like Quickbooks.

If you can avoid these financial slip-ups you should be able to survive long enough to start making a profit.