Most entrepreneurs don’t start out as financial whizzes. But, that particular deficit can cause a myriad of problems, from a crippling lack of cash flow to unsuccessful discussions with potential lenders. That’s why it’s essential to understand five top financial mistakes newbies make and what to do about them.
Mistake 1: Being too vague with bank lenders.
It’s not easy getting a line of credit or loan these days. But, too often, novice entrepreneurs undermine their case by failing to explain clearly how much money they need and what they need the financing for. “That can really frustrate bankers,” says Jerry Mills, who heads B2BCFO, a firm that supplies temporary CFOs to companies. “This isn’t like buying a car.” What’s more, entrepreneurs often don’t provide adequate—or any—cash flow projections or plans for just how they’re going to repay the money. And they don’t specify the type of collateral with which they can back the loan.
Better move: Lay out detailed, specific plans for the money—buying equipment needed to make a product, say, or renovating an existing space. Include why you need the specific financing you’re requesting. Then describe your financial projections and how you’ll have the cash flow required to pay back the money. Remember: You can’t include too much detail.
Mistake 2: Not approaching a bank.
Newbie entrepreneurs sometimes avoid going to a bank at all, fearing it’s a losing cause. But even if you’re turned down, according to Mills, you’re likely to get something out of the experience.
Better move: Meet with at least a few local bankers no matter what—and make sure to ask a lot of questions. For example, even if you’re rejected, the official is likely to be able to refer you to other more appropriate lenders. “It’s amazing the networking that people in banks do,” says Mills. “They probably know just about everyone in the business community in your area.”
It’s probably best to start with local and community banks, since they do the lion’s share of small-business lending. About 55 percent% of small company loan balances outstanding in the first quarter of 2010 were made by community banks with less than $10 billion in assets, according to the Independent Community Bankers of America.
Mistake 3: Not keeping track of costs—or taxes.
You need to have a handle on your expenses, from payroll to health insurance, of course. Otherwise, you can’t know how profitable you are or what your cash flow is. But, fact is, many newbies neglect that basic fact of life. “Many people watch their checking account, but they don’t closely watch other costs,” says Mills. “They forget that cash flow and making money are two different things.”
In addition, many new business owners neglect to plan for taxes. As a result, they find themselves scrambling when it’s time to pay the IRS.
Better move: Hire a bookkeeper or accountant to stay on top of the numbers; you can save money by outsourcing the job. And set aside a portion of profits in a separate account for taxes. “That money should never be used to cover operating expenses,” says Ken Gaebler, a small-business expert with Gaebler Ventures in Chicago.
Mistake 4: Doing your own payroll.
Often, new entrepreneurs try to take care of payroll themselves. But that’s asking for trouble, because it’s unlikely any novice will have a handle on all the complexities of federal, state and local tax laws. Get it wrong and the result can be thousands of dollars in penalties.
Better move: Outsource the job to a third party. Not only will you save yourself a bundle in potential penalties, “It will free you up to get new customers and bring revenues in,” says Gaebler. “That’s a much better use of your time.”
Mistake 5: Not putting in place payment policies.
Certainly, especially when you’re starting out, you don’t want to alienate late-paying customers. For that reason, new entrepreneurs often drag their feet when setting terms or asking for their money. “There’s a real balancing act between selling something and collecting payment,” says Mills.
Better move: Upfront, specify your expectations—stating verbally and in writing when customers should pay you. That way, there shouldn’t be any surprises if, says Mills, “You drive over to their office and ask for your money.”