How to Avoid Five Financial Mistakes Entrepreneurs Make
Business startups are all about the bottom line -- profitability is the standard
by which success is measured. For many first-time entrepreneurs, "profitability"
is an elusive concept. At its base, it makes perfect sense -- bring in more cash
than you spend, and the business will be profitable. At its core, however, there
are numerous factors that keep a viable idea from ever actually turning a profit.
One of the most common problems in business startups boils down to poor financial
management. The fundamental mistakes that entrepreneurs make can be easily rectified
with just a little effort and attention to accounting processes.
The most common financial mistakes made when starting, and how to avoid them, are:
Lack of fundamental accounting knowledge
Entrepreneurship requires a strong basis in basic business essentials, and standard
accounting skills in particular. Simply purchasing an off-the-shelf accounting system
is not enough -- the tool is only as useful as its user. From correctly categorizing
expenses to ensuring debits and credits are balanced, knowing how accounting systems
work, and why they work, is not only a good idea, it is an absolute necessity.
Failure to develop accounting procedures
Every financial transaction in a business should follow a consistent, written, formalized
procedure from decision-making to recording. That is, every income and expense should
follow the same path from approval to data entry into the accounting software. Without
standard procedures, transactions get lost, decision-making becomes inconsistent,
and the numbers never seem to quite work out. Everyone involved with the company's
accounting system need to be handling transactions in the same manner, and those
procedures need to reflect an understanding of financial controls.
Inaccurate data entry
Along with developing standard accounting procedures, it is essential to include
steps that verify the accuracy of the data entered into the system. This may seem
obvious, but every struggling business we have encountered had serious data entry
errors in the books. A small error -- an extra digit, transposing numbers (2521 instead
of 5221) -- can wreak absolute havoc in a fairly short amount of time. Establishing
at least one double-check procedure can eliminate the majority of these mistakes.
Failure to review and analyze
One of the great features of every available piece of accounting software is a set
of easy-to-create financial statements. Unfortunately, many entrepreneurs are number-phobic
and do not take the time to learn how to use these crucial tools for financial management.
A simple, consistent review of the numbers and running a few basic financial ratios
can be extremely revealing, both in terms of potential problems and identifying exploitable
opportunities. Business owners do not have the luxury of being "not-a-numbers-person"
-- business is all about the numbers, thus it is essential to use the available tools
to keep control over your venture.
Failure to budget
It is nearly impossible to launch a successful startup without a well-researched
budget, and even more difficult to survive without planning out the business's financial
future. No budget generally indicates no planning, and tends to result in throwing
good money after bad, especially during lean times in the venture. Setting a budget
allows a business to maintain focus on a well-developed strategy while ensuring the
cash flow is sufficient to keep the business alive and growing.
It is a common but inadvisable error for first-time entrepreneurs to underestimate
the importance of solid financial management. Simply ballparking expenses and taking
a see-what-happens attitude with the cash flow are quick paths to failure. Doing
your homework and mastering the fundamentals of accounting are not just a good idea,
they are the only way to build a viable business idea into a thriving company.
About the Author
LaunchX.com is dedicated to training entrepreneurs to turn their good ideas into
great companies. The LaunchX System provides step-by-step education in the mindset
and skill set entrepreneurs need to succeed. Our program includes intensive seminar
training, key business software, and specialized workbooks that teach you the fundamental
skills you need to achieve your financial and worklife goals through entrepreneurship.
Register today for our introductory course and see what LaunchX can do for you!
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