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Raising capital is one of the hardest parts of being an entrepreneur. Whether they are bootstrapping or funding, every business owner tries to make the most out of the funds they have at their disposal. But, it’s not always easy to tell if you are doing the right thing. Your heart may be in the right place, but your heart may also be clouding your judgment.
Here are 8 red flags that you are making poor business financial decisions. They can help you see things more clearly the next time you make an expensive purchase or apply for a loan.
You Haven’t Done Your Homework
If you are not in the habit of exploring the potential negative consequences of your financial moves, you are asking for trouble.
When it comes to money matters, many people lack the basic knowledge needed to handle their finances properly. The National Financial Educators Council conducts an annual survey on financial literacy.
They asked American adults how much money they lost in 2019 because of financial illiteracy. The average respondent lost about $1,300. Moreover, 17% of respondents reported losing over $2,500.
And these are just the amounts they are willing to admit losing. When it comes to knowledge of financial basics among Gen Zers, the situation is especially worrisome. They show less knowledge than other generations.
This in no way means knowledge of financial issues gets better with age, or when you start your business. It’s something you should keep in mind when you’re borrowing or splurging large funds. It will motivate you to think things through.
It’s never too late to enroll in a financial course or seminar. Taking part in a financial workshop can help you learn how to lower your banking fees, maximize profits, and interpret financial data.
When applying for a credit card or making a big purchase, it’s important to read the fine print. But, more importantly, you must know what to make of it.
If you can’t explain to someone else why you made a certain financial decision, what are its pros and cons, how you benefit from it, and how the financial instrument works, then you are making a mistake.
You must know all the aspects of your financial decision. And, you can rest assured that every financial decision, product, or instrument, has a bad side to it. If you can’t recognize it, it’s time to educate yourself.
You are Being Influenced By Someone Who Isn’t a Pro
Your spouse, friends, parents, or siblings probably mean well, but they can help run your business into the ground. If you invest in new stock on a “hot tip” you got from your cousin, that's probably one of the poor business financial decisions you are making.
This doesn’t mean there’s no truth to your college buddy’s philosophy on spending or your father’s sage financial wisdom. But, unless they are experienced accountants or financial advisors, take their advice with a grain of salt.
Consider who exactly is encouraging or inspiring you to spend your funds. Moreover, whether your advisors are professionals or not, don’t let them make your decisions for you.
You may have a number of employees, investors, and partners who are involved in the regular operations of your business. Everyone has their own ideas and opinions on how things should be done.
You should hear them all out, get the best ideas out of them, and then decide for yourself. Don’t rely on others when making your own business decisions. When you’re the person in charge, make sure that your call is indeed your call
You’re Under Pressure
Lack of time and too much pressure are the main culprits behind many poor business financial decisions. If you are in a situation where someone is pushing you to make a financial decision quickly, don’t ignore the red flag—especially if it’s in a way that favors the other party.
If you have to decide something under duress, chances are the outcome won’t be so great.
High-pressure phrases like “We can only offer you this deal today,” “Supply is running out,” and “You don’t have much time” should immediately cause you to take your business elsewhere. The right offer will still be there even after you’ve slept on it and weighed the pros and cons.
You’re Blurring the Line Between Personal and Business Accounts
If you don’t keep your finances separate you’ll eventually pay the price. If you are a freelancer or “solopreneur,” not having separate accounts may seem more convenient, but you can easily fall into a taxation pit. The IRS has implemented very strict rules against the inappropriate personal use of business funds.
Commit yourself to set up separate checking and savings accounts for your business. It will make it much easier to budget for unpredictable months, plan for quarterly tax estimates, and do accounting for your business.
If your business comes across a rough patch, this move will help you protect your credit score. Separating your accounts will allow for a better picture of your financial health, both personal and business-wise. This way, you avoid making poor business financial decisions.
You’d want to prevent overlap between what the business is costing and generating every month and what you personally earn.
Most importantly, having separate personal and business accounts promotes a healthy way of thinking about your venture. If you are investing in building a stronger future for yourself by growing your business, every dollar your business makes should not go directly into your pocket.
You’re Too Indecisive
Being in charge is never easy. Before making up your mind, it’s easy to ask for one more analysis or report.
Over a decade ago, when more consumers were getting interested in greener, fuel-efficient cars, automotive giants Chrysler, Ford, and General Motors, continued to manufacture gas-guzzling vehicles.
The Big Three did nothing as big dealer contracts made change difficult, despite the fact that they knew the market was changing. GM and Chrysler received an $80.7 billion bailout from the government while Ford received a $9 billion credit line.
Their situation wouldn’t be so bad today if these three companies tackled their issues head-on. The moral of the story is: your indecision may be costing you time and money.
You Immediately Started Making Big Business Purchases
When you’re founding a startup, no one can blame you for wanting to get the best talent, a trendy office, a flashy website, brand new computers, and high-end software.
But, if you are itching to make big purchases while your company is still young, even if they feel like investments, you’ve guessed it—it’s a red flag.
If you think some of these big purchases are necessary, you need to think them over very carefully. Some expenses such as attending industry trade shows or building a website are mandatory, but you need to ask yourself whether and how they will help you generate more revenue, long-term and short-term.
Expenses like frivolous electronics and luxurious team-building trips that offer very little value to your bottom line are something you can do without. If a big purchase is not essential to the growth of your company, it’s best to avoid it.
And, if you can’t afford something, make do with the absolute bare minimum. For instance, if subscribing to a popular CRM platform is too expensive, go with a less expensive or free alternative that will still get the job done.
If hiring regular, full-time employees is too costly, look for talented freelancers on platforms like Upwork or LinkedIn ProFinder. Before spending funds on the “nice-to-haves,” work on accumulating a higher level of disposable cash and grow your business first.
You’re Accumulating Credit Card Debt
When they are expecting future revenue, many business owners don’t think twice about incurring credit card debt. But, in situations like this, you should indeed heed the timeless financial advice you may have received from your grandma: never count your eggs before they hatch.
One of the worst yet most common mistakes business owners make is irresponsible credit card use. Business credit cards come with their own risks.
Since credit cards are so convenient, it’s easy to overlook that you are incurring interest charges and compounding your expenses. If you don’t pay off the full balance each month, it will come back to haunt you. If you prioritize convenience, stick to debit cards.
You’re Making Big Personal Purchases
Even if you have separate business and personal accounts, you may be faced with situations in which you are forced to dip into your personal stash. This especially goes for owners of fledgling businesses.
There are a lot of unexpected learning opportunities and unknown variables during the first years of business. Failures are unavoidable, and some of them can cost quite a lot.
If you’ve rushed out and made a huge personal expense like buying a car or a vacation home, and a big, unexpected business expense comes up, you may not be able to pay yourself next month.
While growing your business, you need to be lean as possible in your personal life as well. In case your business suffers a major setback, you can’t afford to be strapped down with huge personal debt.
Avoiding great financial mistakes is the most important thing
Losing money is far easier than earning it. And, you will lose some money. That comes with the territory. One or bad decisions probably won’t ruin your business.
Financial ruin usually follows a series of poor business financial decisions. Give more attention to the details of your cash flow in order to avoid these mistakes. By taking action immediately, you may ensure the survival of your business.
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