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Tips Small Businesses Can Use For Finance Success

May 16, 2008
Common Finance Mistakes Small Businesses Should Avoid

More small businesses fail than succeed. Some studies show that as much as 90% of small businesses fail in the first five years. Don't let yours be one of them. Avoid these common finance mistakes.

Lack of Sufficient Start-up Funding

Not having enough money is a major cause of failure. Unforeseen emergencies can eat up cash reserves. Establish a credit line or apply for a business loan before you need it. If your business doesn't qualify for a loan, apply for a credit card in your name and keep it for business use only. This credit reserve, or credit card, will allow you to take advantage of opportunities that may pop up, such as supplying a new major customer, product introduction, or media blitz.

Underestimating Expenses

Entrepreneurs have a tendency to underestimate expenses, especially expenses they're not familiar with. It can be a shock to find out that newspaper ad is going to cost three times what you expected or that the Pay Per Click (PPC) budget you though would last a week is used up in less than a day. When projecting expenses add in a contingency factor of 8% - 10%. Base your expenses on actual expenses. If you're not familiar with the type of expense do some research.

Overestimating Revenues

It's a double whammy. Expenses are more than you projected and revenues aren't nearly what you'd thought they would be. You've spent more money and you're getting less return. Be conservative when forecasting revenues. Use assumptions that are realistic and based on fact rather than hope.

Confusing Profit for Cash

Some entrepreneurs confuse being profitable with cash. You can take cash to the bank you can't do that with profits. A profit is sales/revenues minus expenses. If some of these sales are on credit, or on payment terms such as payable after 30/60/90 days, the cash won't be available when the sale is made, but the expenses will still have to be paid.

For example: Sales were $30,000 for the month of March. The sales were from an affiliate program that pays 60 days after the sale was made. Expenses for March were $20,000 so your profit would be $10,000, not bad. However, on a cash basis you won't see the $30,000 until June, but the expenses still have to be paid. If March was your first month of business you'd be in a cash deficit position of $20,000.

Waiting Until the Last Minute

It takes time to establish credit whether it's with a vendor or a bank. don't wait until you're desperate for cash before you start the process. Apply for a credit card for your company as the first step in establishing credit. Talk with your banker and see if it's possible to establish a small line of credit. Use the credit and then promptly repay it within the appropriate time frame. After a year request a bigger credit line and use it wisely.

Don't let these common finance mistakes hurt your business.
About the Author
Dee Power is the author of several nonfiction books. Read her blog Find out more finance and business tips Visit her party site Party Ideas Kids
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