As a small-business owner, it’s incredibly easy to go broke. When you're starting and running a business, your unlimited enthusiasm for the company can lead to unbridled spending. Not sticking to a budget—until there are sales results to support your spending—is one of the most common ways to lose the shirt off your back.
Unfortunately, that’s not the only way. Take a look at these 10 money mistakes that could tank your business:
1. Not keeping an eye on cash flow
Many small-business owners think they only need to track sales, and they don't look at their monthly cash flow statements. They can’t answer the simple question: Did the cash in the bank increase or decrease last month? This is a problem since almost every small company that goes out of business does so because it runs out of cash.
Don't go broke: Ask your accountant to teach you how to read your cash flow statement. At the very least, review your bank statement to see if your company has more or less cash at the end of the month than it did the month before.
2. Investing too much in product or infrastructure first
Don’t focus on building the perfect product or company infrastructure before you have the sales to support it. Many business owners spend too much money developing their product and not enough on marketing it or building a distribution channel.
Don't go broke: As Eric Ries advises in The Lean Startup, “Build the minimum viable product and test to see if customers will actually buy it before proceeding further.”
3. Appearing too successful
Too often, small-business owners just starting out will make large purchases, such as fancy office furniture, leased cars and expensive business trips, to give the appearance of success before they really have it. Many companies failed in the dotcom crash of the early 2000s because they succumbed to this method of spending.
Don't go broke: Only invest in what actually helps develop and sell your product or service. Everything else can wait until there's profit to reinvest.
4. Over promising and under delivering
In a business owner’s enthusiasm to give the customer what they want, they might tell white lies about what their product or service can actually achieve. This sets them up for failure and customer dissatisfaction.
Don't go broke: Be realistic with customers about what they can expect from their purchase. Provide support and feedback to ensure they're completely satisfied.
5. Not paying business taxes when they are due
Many small-business owners aren’t familiar with payroll tax laws or schedules or, for that matter, with the various other business tax laws and schedules. I made this particular mistake in one of my businesses, and government officials came to my company door to shut me down.
Don't go broke: Use an outside payroll service when you hire your first employee so they'll make these payments for you. Keep a separate account for all sales taxes collected from customers, and don't mix them with your general operating account.
6. Using debt for the wrong reason
Many small-business owners borrow money to cover ongoing losses. This is the wrong way to effectively use debt.
Don't go broke: Only borrow to buy capital equipment, fund inventory or fill short-term seasonal cash flow needs. Have your banker review your use of debt each time you apply for additional funding.
7. Not saving for the down cycle
All business is cyclical. Many small-business owners use their sales, especially spikes in sales, to fund investments in their company. However, when the economy slips, the company loses its largest customer or it encounters a new competitor, they realize they put everything into their investment and nothing into savings.
Don't go broke: Always have enough money saved to fund losses if sales go down by 75 percent of current sales levels.
8. Carrying too much inventory
Make no mistake: Building inventory takes cash. Companies that don’t watch their inventory levels can quickly become cash poor.
Don't go broke: Set inventory levels carefully. Strategically think about such metrics as product fill rate, reorder points and reorder quantities to balance sales, cash flow and customer satisfaction.
9. Betting all your money on one product, person or vendor
A lot of small-business owners see themselves as risk takers—they want to bet it all on that next product, person or vendor that will take their business to a higher level.
Don't go broke: Take small, carefully calculated risks that create progress one step at a time. Make a small investment, then test the results to learn what to do next.
10. Not firing a customer who's hurting your business
Often small-business owners avoid firing customers. They may think they need every single one of them because they only have their sights focused on the top revenue line.
Don't go broke: Examine which customers are actually profitable for your company. Take a look at which fit the mission and culture of your company. Also find out which customers your team actually wants to work with. Unprofitable or "out of culture" customers need to be fired over time.
Read more articles on small-business finances.
This article was originally published on August 4, 2014.