Money management is a vital and most difficult part of business, especially for aspiring entrepreneurs. Let’s analyze the mistakes in calculations that most often lead to the collapse of your business.
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Mistake #1. Not Planning Income and Expenses
One of the key functions of an entrepreneur is treasury. In business, it is important that all payments are made on time, otherwise reputational and financial damage can occur.
You can pay your neighbor’s debt tomorrow, not today, without consequences, but, for example, with tax payments it will not work: penalties will be assessed for delays. And if you don’t pay your counterparty on time, the next time he will demand an advance payment.
To plan expenditure and income, keep a payment calendar. It is made on the basis of the total budget of the company and the data of the previous period: a week, a month, a quarter, or a year. Put future payments and expected receipts on the calendar to remind your client if they don’t pay you on time. Stick to the rule: pay on the very last day and get paid in advance and as quickly as possible. Then there will always be money in the account, even if one of the counterparties suddenly lets you down.
Thankfully, business is not 22Bet where you cannot predict how much you will earn. To find holes in the budget and more accurately forecast financial flows, create the financial plan analysis, comparing the planned and actual budget figures and identifying the causes of deviations will help. Weekly or monthly analysis will help to avoid cash gaps. And quarterly and semiannual analysis will help to find systematic deviations.
Mistake #2. Incorrectly Counting Profits
Before you open your business, calculate your expected profits. For example, if working you get $50,000 and would like to have from the business at least, then try to take into account all the possible costs and calculate the net profit.
If you are starting a business alone, decide how many hours per week you are willing to work for your planned profit. Even a good salary is hardly worth the 80-hour work week and lack of days off – in such a mode of high risk of burning out quickly. It is better to “aim” for higher figures: then you can hire one or more employees and free up time for rest.
When starting a business, keep in mind that not all receipts to the account can be considered as your property right away. For example, an advance becomes the company’s money only after the shipment of goods or provision of services. The actual profit is counted by the fulfillment of obligations, not by the movement of money on the bank account. With this approach, you can avoid running out of money if you have to make a return on the eve of payroll or a large payment.
Mistake #3. Analyze Only Total Expenses and Income
Calculate the difference between wrike costs and price – margin – for each product or service individually. This will help assess their effectiveness. For example, one product may be making 80% of the profits, while another may be ballast. Knowing each product’s margin, it’s easier to decide which product to promote, which to improve, and which to eliminate.
At the same time, it is necessary to analyze costs and revenues in general categories, too: by directions and projects, as well as in the company as a whole.
Mistake #4. Spending Too Much on Services
When choosing services for business, such as cleaning or acquiring, owners often settle for the first options they see, to save time. But if we are talking about the service that the company will receive from month to month, it is worth choosing the most favorable offers.
Most entrepreneurs fail to understand that there are specialized digital marketing services that can help them improve and protect their branding and credibility. In the last few years, every start-up that has assumed ‘Unicorn’ status has worked with reputation management agencies to protect them against slanderous and motivated campaigns online. To explore how you can hire a reputation management company, read more here.
Mistake #5. Forgetting to Depreciate Equipment
Plan for the cost of upgrading production assets, advises Dadonov. Even a freelance programmer should set aside $200 a month for a new laptop. And the more expensive the equipment, the more important it is to have a reserve. If machines, computers, and applications last a long time, sooner or later they will become obsolete – and you will still have to replace them.
Mistake #6. Not Considering the Value of Money
Money has a cost, too, so if you’re investing in a business with borrowed money, don’t forget to factor in how much you’ll spend on interest payments, as well as inflation.
Otherwise, there’s the risk of another serious mistake. Let’s say you’ve correctly calculated depreciation, factored in marketing costs, and even provided for a financial cushion. But if the entrepreneur has earned $100,000 in one year for the invested million, he has worked for nothing. Then it is better to invest in the financial market with the same level of risk – and work for hire.