Common Financial Mistakes Most Business Owners Make
Money is the lifeblood of any business. Without sufficient funds, a company runs the risk of shutting down. To manage their finances, business owners usually take matters into their own hands and handle their own accounts. This they feel will save them money in the long run. However, this often results in several mistakes that actually cost them more than expected.
Managing business accounts without professional knowledge and expertise can cause several problems. It can result in wrong projections that affect operations, production, and ultimately revenue and business stability. To avoid struggles like these, CAP3 has listed below some common financial mistakes most business owners make. We’ve also included solutions to prevent them.
1. Managing your business purely on intuition
We find that most business owners are making many of their decisions based on their “gut feeling” or intuition. But this doesn’t necessarily mean their intuition is leading them down the right path. Several business owners lack suitable metrics or information to help them make effective, data-driven decisions for their business. As a result, they depend on their intuition.
Solution: Focus on what is important
As a business owner, one must determine the three to five most important aspects that will impact the overall success of their organization. Revenue is just one component. To earn a decent revenue and maximize it over time, they need to determine which are the other areas of business that need attention. For this, they will require a system in place to track, analyze, and reinforce the KPIs (Key Performance Indicators) that will have the largest impact on their success. Then they will need to hold their team accountable for achieving the required level of performance in each area.
2. Making decisions with inaccurate financial information
Most small business owners believe that they are doing the best job they can from an accounting and bookkeeping perspective but aren’t equipped to manage the finance function well. They simply don’t have the training or experience to ensure their financial statements are correct or know how to spot them when there are issues.
At CAP3, we find that most small businesses don’t have an accurate understanding of their actual costs. In most cases, we never come across an organization that has routinely overstated their COGS (Cost of Goods Sold), as it is always the other way around. If the COGS is misrepresented, a business owner is making decisions based on inflated margins. This is a recipe for disaster.
Solution: Build a highly skilled and experienced accounting department
This is much easier said than done. While sometimes exciting, hiring a training a brand new team or department is rarely fun or easy. The process becomes increasingly challenging when a business owner lacks a background in accounting or experience in selecting individuals for the role of CFO, Controller, and Staff Accountants. The chances of getting this right the first time are slim, not to mention the cost of a team of accountants is extravagant. In most cases, a business will spend at least $300k to $500k annually to have a department with competent individuals in those three positions.
Fortunately, there is a way around these costs and challenges. It involves finding a Fractional CFO or Fractional Controller firm. They will take away all the hassle of hiring and developing the right team. The best part is that the cost of outsourcing accounting functions is a small fraction of what would have been incurred to bring those positions in-house.
3. Carrying too much or too little inventory
At CAP3, we also find that most product companies get tripped up when it comes to the appropriate amount of inventory to carry. This shows up in one of three ways:
a. they have too much inventory (putting unnecessary strain on cash)
b. they have too little inventory (losing revenue due to stock-outs, etc.)
c. they have the wrong inventory (carrying too many non-performing SKUs and not enough top-sellers.
Solution: Analyze inventory data
To overcome inventory issues, business owners need to spend time analyzing move rates, reorder points, and sales by product information to make sure they are making the right purchasing decisions for their business. They should also consider what level of inventory is the right amount give their cash position and marketplace expectations.
To avoid more mistakes like these, reach out to the experts at CAP3. We are leading accountants and chief financial officers in Wilmington, NC. We aim to provide business owners accurate, complete, relevant, and actionable information. That way, they can make the best decisions for the growth and success of their business. As an accounting firm catering to business needs, we offer services like cash management, business intelligence, accounting reports, and strategic conversations with a CFO.