The majority of small businesses fail within the first five years. It is a frightening statistic, but one that should urge you to learn from the errors that others have made. The majority of mistakes made are financial, and in this post we are going to take a look at some of the most common blunders in greater depth.
- Failing to see the full picture when taking out a loan – If you need a small amount of money, you may be tempted to go for a short-term loan whereby you pay back a larger rate of interest over a short period. This appeals to a lot of people because it means that they are not borrowing huge sums of cash. So they simply opt for the loan with the lowest rate of interest. However, the intangible costs can be huge, and this is often overlooked. For example, you may need to pay a bookkeeper for an hour or two of work, which alone can be greater than the rate of interest itself.
- Ignoring opportunity cost – You are advised to treat opportunity cost like a real cost. As they say, time is money. Just think about how long it takes for a bank to approve a loan. Firstly, you need to wait until the loan application has been approved, which can take a few weeks, and then you can find yourself waiting months and sometimes even a year for the loan to be funded. When you take the loss of time into consideration, you see that the lowest APR is not always the best option in terms of financing. Instead, it can often be more beneficial to look for a lender that is able to move with the speed required.
- Lack of quality financial and accounting information – This is one of the biggest mistakes new business owners make, as they don’t keep on top of their bookkeeping and accounting commitments. The main reason this occurs is because they fail to see the significance in investing in small business accounting software and using the services of a chartered accountant. This isn’t an unnecessary expense; it gives your business the platform to grow and can save you money in the long run too.
- Failing to build up a cash reserve – It is vital to have personal cash in reserves before you embark on any business venture. In most cases, you won’t make a profit straight away, and although the costs of going into business aren’t necessarily going to be extortionate, you still need to have cash set aside, especially as you will have tax to pay.
- Overlooking hidden fees – Last but not least, a lot of small business owners find themselves in a tricky predicament when they overlook hidden fees by accident. However, whether you are taking out a loan or entering into any other type of financial agreement, you need to be mindful of hidden fees. This is the only way you will get a true reflection of what you are paying.