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Failure is Temporary: Using Financial Missteps to Your Advantage

Posted by Bill Gerber on January 23, 2017

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Whether you have been in business for decades, or you are just getting started, money management can be an issue no matter which bookkeeping services or controller services you use. The good news is that one financial misstep is not the end of the world. In fact, you could be able to use those mistakes to gain insight into your operations and forestall issues in the future.

Undercapitalization and Cash Flow

It can be a challenge to have enough operating capital, no matter the size of your company. Even if you have been operating with plenty of cash flow, all it really takes is one client with high billables who doesn’t pay on time and you are shuffling to make ends meet. Avoid the risk of undercapitalization by being more conservative in your project estimates. MasterCard Biz recommends that small businesses estimate what they think their costs will be, then double it.

Putting All Your Eggs in One Basket

If you find that your company is undercapitalized, what you may be seeing is that your client base is not diversified enough. Too much of your income is dependent upon a single client paying on time. Avoid this issue in the future by diversifying your client base and courting new clients before your contract has ended with any of your current clientele. Also, consider introducing project milestones and intermittent invoicing into your operations so that you don’t have to wait as long to realize cash flow, and stop allowing accounts receivable.

Losing Track of the Numbers

Poor accounting is another issue. Inaccuracies can mean that you don’t realize how much a job or project really costs or that you overestimate your cash flow. There could even be legal ramifications if you reported inaccurate income or didn’t pay enough in taxes. If you have been in this situation, or know deep down that you haven’t been paying attention to the numbers, it's time to buckle down on accounting. If you don’t know basic bookkeeping or simply don’t have time to run the numbers, consider outsourced bookkeeping services or hiring a professional bookkeeping company.

Expanding Too Quickly

As your company grows, it can be tempting to start expanding as soon as you are able. You upgrade your computers, hire new workers or invest in new space. Whatever your temptation, expanding as soon as you can afford it can be a recipe for disaster. Expansions increase your overhead costs and dilute your available cash flow, and some obligations have a longer-term horizon, like signing a lease. That may work out fine, as long as your cash flow remains consistent, but if it doesn’t, you could find it hard to cover all your new expenses. Avoid the risk by making more conservative forecasts and delaying expansion until it is absolutely necessary.

Pricing Too Low

Of course, sometimes financial mistakes can happen, even if your operations are sound. One great example of this is pricing your products too low. “Unless you are Walmart or are trying to be (and have a real hope of achieving this), it is almost always better to sell fewer units at higher prices than to sell more units at lower prices,” explains Inc. “High prices protect your margins and also enhance your brand. Even 5 to 10 percent price increases can make a significant difference to the bottom line.” Instead, find ways to differentiate your company that do not involve low-pricing, or at least not entirely.

Financial mistakes can be fatal in business and in your personal life, but they also happen all the time. When your company’s finances become strained, take the time to look at the underlying factors. You can use that information to inform your operations and improve your odds of success going forward.

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Tags: small business tips, accounting tips, financial management