1. Thinking you can lose money on a product and make it up on selling your other products and services.
If you have 1,000 “give aways” and you lose $10 on each one that is a $10,000 loss. Assuming that you normally earn 8% net operating profit you have to generate $10,000/.08 or $125,000 in revenue to make up for it. Can you?
2. Not having proper cash handling procedures in place.
Put the proper procedures in place so that you keep the honest people honest and don’t tempt them. Procedures will never keep the embezzler at bay. He or she will find a way around the procedures. However, focus on the 99% of the population who is honest. Put, at a minimum, these procedures in place:
• bookkeeper does not sign checks
• owners or senior managers are the only ones who can add a vendor to your software program
• person who opens the mail does not make bank deposits
• send bank statements home.
3. Going to the “Big Boys Toy Store” when you have a great year.
You are having a great year and you want to reward yourself. Or your CPA tells you to spend cash so that you don’t have to pay taxes. Beware of spending too much cash. I’ve seen owners spend a lot of money in December and then have a cash flow crunch the first part of the year because they spent the cash they would have used to carry them through the winter.
It’s ok to reward yourself. Do it sparingly and make sure you have enough cash to survive slower times!
4. Not being your own bank.
I’ve seen bankers put companies out of business. The owner has a line of credit with a bank and the bank is sold or management changes their loan practices. The bank calls the line and the owner has 30 days to pay it back and can’t do it. The bank takes all the assets pledged to the line and the business is out of business.
Build a recurring revenue program. Put at least 50% of the cash you receive from that program in a savings account. Then your pleasant dreams won’t turn into nightmares wondering whether you have enough cash to make payroll this week.
5. Not putting 1% of every dollar that comes in the door in a savings account.
This is a corollary to #4 above. Even if you have a recurring revenue program or don’t put 50% of it away, you can still put 1% of every dollar you deposit in the bank into a savings account. Do it starting today.