33 Finance Experts Reveal the Number #1 Mistake Small Businesses Make with Money and Finances (and How to Avoid It)

Written by on April 30, 2014 in Small Business And News - 2 Comments
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Ask any small business expert and they will tell you that, aside from providing a truly valuable service or product, proper money management is among the absolute most important aspects of a successful business. It makes total sense: money relates to every part of a business from top to bottom, so you would think that small business owners would take every precaution available to protect their finances.

Yet time and time again, you’ll see countless small business owners who seem to have their act together fail miserably by virtue of careless money and finance missteps that they could have easily avoided.

As a company dealing closely with business finance, we wanted to know some advanced tips on how small businesses can ensure they’re making the right money management decisions, and also how they can avoid the most common (and avoidable) small business finance mistakes. To do that, we asked 33 business finance experts the following question:

What’s the number one mistake small businesses make when it comes to money and finances?

We’ve collected and compiled their expert advice into this comprehensive guide to effective money management tips for small businesses. We hope it will help you improve and protect your company’s bottom line, and ultimately ensure that you have the right business finance plan in place that will lead you to success.

Meet Our Panel of Small Business Finance Experts:

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Jeremy Brenn

Jeremy Brenn the Vice President of Sensen IG Capital, and is responsible for many of the firm’s client relationships, as well as managing the strategic direction and wealth management process for Sensenig Capital. Jeremy earned his Bachelor of Arts degree from York College of Pennsylvania, as well as his Master of Business Administration in Finance from Hood College, Frederick, MD. Jeremy is an active member of the Financial Planning Association (FPA) and also holds the distinguished CERTIFIED FINANCIAL PLANNER(tm) professional designation. He has been quoted in the Philadelphia Inquirer and a variety of other personal finance related sources. In addition, Jeremy currently serves on the Board of Directors at Meadowood Senior Living, a non-profit continuing care retirement community located in Worcester, PA.

From our perspective as wealth managers specializing in working with small business owners, the one mistake many small businesses make is…

Overlooking the importance of a well-crafted retirement plan that not only serves to begin building a retirement nest egg for the owners, but also creates an attractive benefit for potential future hires.

Most small businesses just use the retirement plan package offered by their payroll provider when, what they should do, is work with an independent third-party administrator firm to tailor the retirement plan specifically to that business.


Deborah Sweeney

Deborah Sweeney is the CEO of MyCorporation.com, which she acquired from Intuit in 2009. She is an attorney turned business owner and loves the flexibility and excitement that entrepreneurism affords. Deborah holds a JD/MBA from Pepperdine University. Her husband is also an entrepreneur and they have two awesome, sporty children in addition to running her business.

The number one mistake small businesses make when it comes to finances and money is…

Not knowing their return on investment.

Sales can often lag when a business owner does not know their ROI for different marketing strategies. A business owner might do too much of the wrong thing and not enough of what is working. When businesses are investing money in the areas that are not yielding a positive return and they do not know it, they can lose a lot of money quickly. Conversely, when business owners are spending on the right things and revenue is growing, but they do not know why revenue is growing, it can lead to poor decision making.

Being able to measure the return on any investment is a key method to increase sales. Small business owners often don’t utilize this measurement. However, the key to increasing sales is to track what is being spent and be able to associate return with all expenditures. Doing more of what works and less of what doesn’t is a great way to get grow a business!


Barry Maher

Barry Maher is an accomplished independent consultant and speaker and has appeared on the Today Show, NBC Nightly News, CNBC and is frequently featured in publications such as the New York Times, the Wall Street Journal, the London Times, Business Week and USA Today. His client list includes notable organizations like ABC, the American Management Association, Budget Rent a Car, Canon, Cessna, Fox Cable Television, Fuji, Hewlett-Packard, IBM, Lufthansa Airlines, Merck, the National Lottery of Ireland, the Small Business Administration, the U.S. Government, Verizon and Wells Fargo, among others. Barry is also author of the “Filling the Glass”, which has been cited as one of The Seven Essential Popular Business Books by Today’s Librarian along with books like “The Seven Habits of Highly Effective People” and “The One Minute Manager”. You can find more about Barry’s work at www.barrymaher.com

I’ve worked with thousands of small businesses and perhaps the biggest mistake I see when it comes to money is…

Spending themselves out of business before the business has a chance to become the cash machine it might be.

Initially, of course, you’ve got to have sufficient seed capital to last long enough to generate enough business to stay afloat. Then, as the business grows, budget your capital strictly, being sure not to spend more than your pocketbook and your revenue will allow. Too many businesses hire too many people too soon, or lease unnecessarily grand office space, or spend fortunes on office furniture no customer will ever see. What they don’t have is a reserve fund that sufficient to see them through the tough times that will inevitably come.


Stephen Rischall

Stephen Rischall is Vice president of 1080 Financial Group in Los Angeles, CA, a full service investment management & financial planning firm specializing in business transition planning and working with multiple generations of family clients. Stephen was featured as a finance expert in the Wall Street Journal for his knowledge about small business finance and family owned businesses.

The biggest mistake small business owners make with their money and finances is…

Not planning ahead of time to align personal and family goals with the business.

All too often we hear business owners telling us that their “retirement plan” is selling the business. We see them consistently reinvest their earnings into the venture and not putting enough aside to save and diversify outside of the business. Fact of the matter is a successful business can leverage debt responsibly; there are many ways to free up cash flow outside of simply reinvesting earnings. Long term this can have serious consequences, it’s not easy selling a business and as technology and consumers evolve, businesses that were successful for many years may not be viable in the future.


Andrea Travillian

Andrea Travillian is a personal finance expert with a focus on helping her clients achieve financial independence that is in line with their life and goals. Since 2007, she has been working with individuals and micro businesses to help them understand and manage their money, and has worked in banking, corporate finance, taxes, and retirement investing both in the United States and abroad in Australia. She is an author of four books, is a frequent contributor at About.com and speaks on topics ranging from basic money management to understanding your start-up business money. You can find out more about Andrea’s work at www.takeasmartstep.com.

The number one issue for small businesses when it comes to money and finances is …

Mishandling cash flow.

This mistake often revolves around trying to over complicate the numbers and not paying attention to net profit. For the first part, trying to run your small business with accountant reports won’t help you if you don’t understand them. It is better to set up a system of tracking of your bank account balance and upcoming revenues/expenses – that makes sense to you. Likewise, reviewing your profit for the week or month, will keep you financially healthier than just looking at revenues. Even if revenue is high, if you are taking a loss on every sale then you have a cash flow problem. When you track your revenues and expenses in a way you understand and ensure you are making money then you can build a business!


David Pope

David Pope is a CPA that provides creative solutions to complex business and tax problems experienced by organizations throughout the United States. Through his CPA firms in Wyoming and Colorado, as well as his other affiliates, David helps to structure businesses that balance tax, financial and asset protection strategies. You can find more about David’s work at www.davidpope.com.

The number one financial mistake I see from businesses is…

Spending money each year that should be used to pay their taxes. This creates an additional drain on cash the following year and can even cause bankruptcy if a big year is followed by a bad year.


Nancy D. Butler

Nancy D. Butler is a national speaker and paid consultant to financial advisors in different parts of the country under her current consulting organization, Above All Else. Nancy gained real life business and financial management experience from building a business from scratch as a single parent with no other source of income and only $2,000 to her name. She grew that business to approximately $200 million in assets under management, and in 2007, sold the business to pursue other business endeavors. She is now a national, professional speaker, business coach and award-winning author helping businesses do a better job for their clients and improve their bottom line. Nancy has been quoted in many local and national publications including USA Today, Money Magazine and The Day and has been a speaker for major corporations such as Pfizer, General Dynamics and Dow Chemical, among others. Her first book “Above All Else, Success in Life and Business” was published in 2012.

The number one mistake small businesses make when it comes to finances and money is…

Not doing the research before they open the business to assure the budget is correct and properly funded.

Many people go into business because of a passion they have without having everything in place before hand to properly manage the finances of the business. For example, they enjoy cooking so they open a restaurant without taking the time to fully research the ongoing funds that are needed and without having a good cash reserve and “plan B” for when that cash reserve isn’t enough to cover slow times or unexpected expenses. They also may not have the background, knowledge or experience they need to properly manage the finances of the business and do not truly know what money it takes to run the business efficiently and effectively.

For many businesses today, competition is fierce, technology is ever changing and money is tight. In order to keep up with the competition and run a financially healthy business you may need to continually upgrade equipment and technology to stay ahead of the competition and be the “company of choice”. You may need to hire a payroll company, accountant or other professional to handle the financial part of the business to enable you to have time to focus on the running of the business itself.

Often it seems business owners think they can do it all only to find out there aren’t enough hours in the day even if they do have the expertise. If they have not budgeted properly for the professional help they need, it can cause the business to not have the success it otherwise could have and could even cause it to fail.


William R. (“Bill”) Cobb

William R. (“Bill”) Cobb is a successful business executive and entrepreneur, and the founder of Targeted Tactics LLC in Fort Collins, Colorado. Previously, Bill served as President and CEO of a technology startup company, and also as Managing Director of North American Operations for CH2M HILL’s™ Communications Group. Bill has been recognized in America’s Registry of Outstanding Professionals, and is a member of the International Association of Business Communicators™. He is also listed with the International Association of Speakers Bureaus. He is the author of Targeted Tactics: Transforming Strategy into Measurable Results, and co-author of Business Alchemy: Turning Ideas into Gold. Cobb and is the co-host of Small Business Adventures on Bloomberg Radio 1060™.

Small business owners and entrepreneurs are usually quite accomplished at their trade – the “thing” that they know how to do that brings value to the marketplace. However, the one area of business that many seem to struggle with is…

Financial planning.

Part of the reason for this is just their lack of knowledge in this arena, and even if they do have some background education, they prefer to avoid the tedious process of figuring it all out. For instance, many of these business owners grasp the concept of the operating or profit and loss statement, which essentially is basic arithmetic: money in from sales, money out from expenses. As a result of this, they do pay attention to their “bottom line” so to speak. What they have difficulty grasping is that they can be profitable from operations and still run out of cash. Recognizing how changes in their balance sheet and financing arrangements impact their cash flows is a concept that they all have difficulty understanding.

As business opportunities present themselves, we are inclined to want to take advantage of them. Often they will require that we purchase an incremental amount of inventory or materials or be required to provide extending selling terms resulting in waiting a bit longer for those receivables to turn into cash. The result is we are reporting an increase in revenues and profits, but we have run out of the cash necessary to sustain operations. Sadly, this happens a lot, and it is avoidable. Lenders are more than happy to provide funding to accommodate these kinds of growth or seasonal fluctuations, business owners just need to recognize the need and plan ahead.


Ken Boyd

Ken Boyd is the owner of St. Louis Test Preparation. He provides tutoring in accounting and finance to both graduate and undergraduate students, as well as investment education. Ken is the author of “Cost Accounting for Dummies”, “Accounting All-In-One for Dummies” and “The CPA Exam for Dummies” (Available 2014).

Based on my experience with small businesses, a business finance mistake that causes many new businesses to fail is…

Running out of cash, and not because they’re not profitable.

The business may generate a profit, but simply not be able to collect cash fast enough. Companies in this situation often can’t raise additional cash quickly enough to fill the gap caused by accounts receivable.

There are three critical cash-related questions an entrepreneur needs to resolve and stay on top of:

  • #1- Cash flow requirements: A business owner should forecast their cash needs- and update that analysis every month. This work tells the entrepreneur how much cash inflow will come from business operations, and how much cash needs to be raised through assets sales or raising capital. When the owner is looking for funding, they’ll be able to quickly answer the question: How much capital do you need, and for what purpose?
  • #2- Will sales growth outpace cash collections? This question is a subset of #1 above. A startup may expect more rapid growth in the early years of the business. While sales growth is fine, the entrepreneur may find that total cash collections slow. If you’re sales growth 20 percent and your receivables increase 40 percent, you may not have enough cash to operate moving forward.
  • #3- Cash for long-term asset purchases: Part of the cash discussion involves planning for cash outflows to buy long-term assets, such as equipment, vehicles, etc. A new business may not be able to operate without important assets. Paying for those assets needs to be a part of the cash planning discussion.

If the owner addresses these issues on a regular basis, the business will grow. These are also critical questions that a potential investor will ask an entrepreneur- why not be ready?


Lucinda Cross

Lucinda Cross is an author, speaker and business consultant, specializing in supporting women in leveraging and monetizing their message. Lucinda is the best selling author of “The Road to Redemption: Overcoming Life’s Detours Obstacles and Challenges”, and a nationally known speaker on ABC Money Matters, NBC, Daily News, NY 1, Dr. Oz, The Bethenny Show, and over 100 internet talk radio shows. She is also co-owner of the Super Mom Entrepreneur Conference and Expo and the standing room only Annual Activate Conference. You can find more about Lucinda’s work at www.lucindacross.com

The number one money mistake most businesses make is…

Not doing proper book keeping.

Specifically, many don’t keep up with their expenses and most co-mingle funds. In general, many businesses simply don’t measure their profit or loss on a monthly consistent basis, which is a huge mistake in terms of business finances.


Lori Atwood

Lori Atwood is Registered Financial Consultant and has worked in finance for almost 20 years, most recently spending the last five years as an investment and financial consultant, for foundations, institutions and individuals through her own firm, www.loriatwood.com. Lori started her finance career in telecom investment banking in Europe, and later, as the CFO of a 20-person internet start-up where she oversaw the acquisition of that company by a larger one. Lori’s extensive experience in investment banking and financial consulting combined with her passion for helping families and individuals get to where they want to go financially allow her to turn complicated financial practices into easy to use financial tools.

The number one mistake I see businesses make with money as a small business and start-up financial consultant is…

Having all the right bookkeeping software, project management, accounting help, but not knowing how to tie it all together.

They don’t know the basic financial facts of their own company. Every small business owner should know how much revenue, expenses and profit they made the last month and how much they expect for the next month.

Claiming to not be “finance people,” is not good enough, because small business owners have a responsibility to their employees and clients to know where the business is headed financially.

Do not outsource your business’ finances. You, as the owner, have to know how much your business makes each month, how much it’s expected to make month by month for the next year. Although nobody knows the future, you have to do some forecasting so you can know what all those great marketing proposals and leads turn into.

You, as the owner, have to know how many projects or clients you need to close in order to hire a new employee or lease new office space. You cannot rely on your bookkeeper or “finance person”. You have to keep those numbers in your mind all the time and know when you’re spending more than you should be or when a few lost projects or clients threaten your ability to make payroll.

Once you get the hang of simple forecasting and cash flow the owner can know her finances and not outsource, ignore, or avoid financial reality. You can hire a financial counselor to get you organized and show you what you need to monitor, but it is your responsibility to keep on top of it.


Carol Coughlin

Carol Coughlin is the Founder of BottomLine Growth, a growth advisory company providing outsourced CFOs and COOs to growing companies. Prior to founding BottomLine in 2006, Carol spent 20 years turning around 4 companies followed by significant growth and the sale of three of these companies. While in her prior corporate life, Carol served as CFO for companies up to $350MM, while many of her clients today are much smaller- from about $2MM up to about $75MM in revenues. Her expertise is across many different industries: healthcare, manufacturing, technology, financial institutions, construction, education, non-profits and service companies all of whom are experiencing significant growth and/or transitions.

The biggest mistake businesses make with their money and finances that I see repeatedly is…

An over-reliance on the bookkeeper in a number of ways, but notably two:

  • One: promoting the bookkeeper when he/she clearly doesn’t have the skill set, and
  • Two: giving the keys to the bookkeeper for everything- all of the accounts, all of the financial aspects of the business, with no checks and balances.

Both of these scenarios can kill a company and at a minimum create havoc.


Joe Geiger

Joe Geiger is a seasoned business professional who over a period of 55 years, started, built, and sold 10 businesses that hired from 5 to over 100 employees, some which were funded personally, others with stockholders. Joe has taught college entrepreneurship, and in 2011, published a book “Entrepreneurial Success, 101 business Principles, The Road To The Top”, a practical book geared toward entrepreneurs on how to find business opportunities, write a business plan, start, grow and market a businesses, its products and/or services, and finally exit the business. To learn more about Joe’s work, visit his website www.TheRoadToTheTop.com.

After starting and building 11 businesses over the period of 50 years, I think that the #1 mistake that small businesses make is…

Not writing yearly business plans including a realistic 12-month Cash Flow Forecast.

Of course, the plan must be executed daily and the weekly results must be compared with the weekly plan. If the weekly plan and the weekly operating results don’t match, then adjustments must be made immediately to operations and to the plan in order to see what the real costs will make to the plan over time. In that way any serious future financial repercussions will be discovered and corrective measures made, long before they occur. I know of no other way to control a company’s financial health.


James Krewson

James Krewson is the Owner and Founder of FindersCheapers.com price comparison, which is a search engine that covers more than 100 million products. James has been managing the operations and finance for FindersCheapers.com over the past ten years, and the site is currently approaching $20 million in retail sales.

I think the biggest financial mistake many small businesses make is…

Not creating proper cash flow projections for various revenue scenarios.

I’ve learned from past experience that I need about three cash flow projections based on different growth paths for my business prior to any major capital expenditure. I try to anticipate my working capital needs for declining YOY revenue, the same YOY revenue, and accelerated YOY revenue. Having to scramble for a line of credit a couple of months after a big capital expense is no fun. Its better to anticipate a future cash flow crunch and be prepared.


Shyam K. Iyer

Shyam K. Iyer is a graduate of the London School of Economics and is a finance professional and managing director of SKI Finance LLC. He founded SKI Charities in 2010 to empower women and girls in remote areas of the world who have little, if any, opportunities for growth. SKI Charities currently operates in Chile and Zimbabwe. To learn more about Shyam’s work, visit www.skicharities.org.

When it comes to money and finances, the biggest mistake businesses make involves…

A failure in budgeting; specifically, not devising and transparently managing the budget. Too often small businesses have a budget that flows top-down rather than bottom-up.

When a founder or head manager dictates a budget to staff, it is often driven by pure finances without realizing the operational needs of the team. As a not-for-profit needing to carefully deploy our donations, we set out to budget with full input of our employees who in fact are the people responsible for day-to-day operations. With their input and resulting ownership, we have been successful in avoiding the debilitating cost overruns and misaligned expectations that ultimately cause friction and underperformance within a small business.”


Emily Washkowitz

Emily Washkowitz is the Founder and CEO of Shareswell, the simple and secure online platform for gifting stock. With Shareswell, which officially launched its free platform this month, April 2014, anybody can register for and create their ideal stock portfolio and anybody can gift stock or cash toward a stock purchase

I think the #1 mistake small business make when it comes to finances and money is…

Setting expectations.

Money is spent quickly. Salaries are expensive. And it always takes longer to close financing than expected. I have experienced this a number of times and now with Shareswell, the simple and secure platform, I am trying to manage my expectations and my investors’ expectations. Transparency and accountability are key.


Ty McLaughlin

Ty McLaughlin is the Chief Financial Officer of OnceLogix, LLC, a solutions provider specializing in developing custom, enterprise level, web-based applications for businesses of all sizes. Ty is also a serial entrepreneur, licensed Financial Advisor, coach and speaker.

The #1 mistake Small Business owners make when it comes to finances and money is…

Paying themselves (The Owners) too soon, and often times, too much too soon.

Most businesses fail because they are under capitalized! Using funds that could be used to grow the business for salaries can be extremely detrimental to the bottom line. When starting a new business, owners should be able to go without pay for 8-12 months at a minimum. This allows capital to be directed towards revenue growth, which will eventually allow the owners to get paid and the business to continue to grow.

A Great formula to use is to decide on an amount that can be paid out of monthly profits after reinvesting into the business and placing aside monies for an emergency fund, and only paying the owners from that amount of money. This incentivizes the owners to increase revenue at a faster pace, because that’s the only way they can create a salary. As a business owner, you always take care of the business, and employees first.


Bill Black

Bill Black is a Financial Consultant for over 25 years working with Business Owners and a Radio Talk Show Host where he has interviewed over 140 Professional Advisors who work with business owners. Learn more about Bill’s work and radio show at www.ExitCoachRadio.com.

In my many years of experience as a financial consultant, the biggest mistake businesses make with money is…

The lack of a well thought out cash flow plan.

Even when there is a written plan, most business owners are so emotionally charged up by how great it is to be in business that they make unrealistic expectations in the areas of:

  • Revenues: Project your numbers. Then cut them in half. Then cut them by another 25%. Sales always start out slower. Don’t give up.
  • Advertising and Marketing: Project your numbers. Double them. It takes a lot of effort to make a splash. But don’t do it alone — you really need experts these days to identify the right message for the right platform. You need a “crawl” plan to start, then “a “walk” plan, then a “run” plan.
  • Unnecessary Expenses. Have someone with a level head that will say “no” when necessary, or you may end up like a client of one of my guests — with a very expensive conference table and no customers in the chairs around it.
  • Administrative “stuff”: Project, then double it.
  • There is always more that needs to be done than you can imagine. Having a pro forma P&L is a good start, but be sure and find someone who has “been there, done that” to help review the numbers and make sense of it all. I suggest you check with a local SCORE Chapter for advice. There are 330+ chapters and the 11,000+ volunteers are all retired experts and professionals who can help you learn a lot, usually for no costs.


Chris Miles

Chris Miles, the “Cash Flow Expert,” is a leading authority on how to quickly create cash flow and lasting wealth for thousands of his clients, entrepreneurs, and others internationally! He has been featured in US News, CNN Money, Bankrate.com, and has a high reputation for getting his clients life-altering financial results in his company, Money Ripples.

I’ve worked with hundreds of small business owners, and the mistakes are typically the same. The #1 mistake small business owners make with their finances is…

Not tracking it carefully enough.

Most think that they have to spend hours doing it themselves (which is usually only at tax time). By then, it’s too late. On the other hand, some will delegate it to someone else, but they never have a real-time pulse regarding their financial situation. As a result, this can lead to cash flow issues in the business, cause them to react too slowly to necessary changes, and create a lot of headaches. Investing just 10 minutes a week making sure your numbers are up to date and knowing the financial situation of your business is critical for its success.


Ryan Himmel

Ryan Himmel is a CPA and Founder and CEO of BIDaWIZ.com, a professional network for small business to obtain advice and services from a team of online CPAs, EAs, CFPs & Tax JDs.

The biggest mistake that small business owners make with their money and finances is…

Not investing in the most profitable part of their businesses.

Whether they have excess working capital or access to financing, many small businesses get emotionally attached to the part of their business that they’ve been doing the longest and lose sight of the area that provides the greatest potential future growth. I would encourage all small business owners to get comfortable with the concept of effective use of capital in order to build long-lasting sustainable businesses that grow.


David Johnson

David Johnson is the founding partner of ACM Partners, an advisory firm providing performance improvement, turnaround and restructuring services to small and midsize companies. He has have spent over 15 years working with organizations in transition, in roles including advisor, board member, investor, and operator. David received his MBA from the University of Chicago and completed his undergraduate studies at Fairleigh Dickinson University.

The biggest mistake small businesses make regarding financial matters is…

Failing to understand that a company’s finances are inextricably linked to all other aspects of the business.

Too many small business owners fail to appreciate the rate of sales growth will impact cash flow, or that a capital-intensive project can look appealing on a P&L basis but be ruinously
expensive in terms of capital expenditures. Understanding that businesses are holistic entities, and that financial strength (or weakness) is generally a lagging indicator of facts on the ground, is far and away the largest self-imposed challenge that business owners face.


Rohit Arora

Rohit Arora is the CEO and Co-Founder of Biz2Credit and is one of the country’s leading experts in small business finance. He has extensive experience in financial services and the issues facing startups and growing small businesses across the globe. In 2011, he was named New York City’s “Top Entrepreneur” by Crain’s New York Business and meets regularly with top executives from the Federal Reserve, Treasury Dept., SBA, and the White House on topics related to small business finance. Rohit is frequently quoted about small business lending topics in media such as Bloomberg Radio, Bloomberg BusinessWeek, Reuters, The Wall St. Journal, Washington Post, New York Times, Fortune, Forbes, TheStreet.com, and Entrepreneur, among other notable publications. He is a contributing small business finance writer for FOX Business Small Business Center, Entrepreneur.com, and SmallBizTrends.com.

I would say there are a few very common financial mistakes small business owners tend to make, and they are….

Underestimating funding needs, overestimating or underestimating demand, and staffing issues

Underestimating Funding Needs

Many entrepreneurs think they can start their businesses for a certain amount, and then quickly find out that they are running out of money. There are always snafus – unexpected building and permit costs and other unforeseen problems. This is a relatively common mistake, and it can be a real big problem. Why? If you run out of money quickly, it could indicate to lenders that you estimated poorly, are inefficient, or, worse yet, are unable to keep a handle on your finances. None of these bode well for prospective funders.

It is reality that potholes happen along the way. It’s challenging, but not impossible, to get a second round of funding if you have the right documentation. However, it is best to avoid this from happening. Borrow more than you estimate you will need. You can always pay it back. but you might not always get a second round of funding if your lender thinks you cannot budget well.

Overestimating or Underestimating Demand

If you are selling a product, you are going to have to deal with the issue of beginning inventory. There are ways to get a close estimate with market research and such, but in the end it is an estimate only. Optimism is great, but do remain realistic. If you see product is not moving as you thought it would, try to increase demand through a sale or a contest to draw in customers – perhaps a “buy one, get one free” type of deal.

Conversely, if you are having trouble keeping up with demand, the sooner you realize it, the better. If you are continually unable to provide customers with what they want, they will become frustrated and dissatisfied, leading them to look for what they want elsewhere. If you do not meet demand, someone will.

Many business owners shy away from borrowing money early in the life of their business, especially if they are already in debt from financing the startup. If demand is high however, it could be well worth it to borrow in order to meet demand by purchasing more inventory. Consider using an online platform such as Biz2Credit.com, which connects small business borrowers with banks, credit unions, micro-lenders and other lenders.

Staffing Issues

If you are constantly running in circles because of the work volume, hire more people. Just be sure that you are judicious about whom you hire. If you have more people than you need, you are going to have to cut someone. Explore the option of moving people around on the schedule or cutting hours, but in the end if you have too many people, you might have to reduce your workforce.

Mistakes in any of these areas are bound to cost money. The important thing is to fix them and quickly move on.


Fredric Abramson

Fredric Abramson has many years of financial management experience as a CFO for a Dunkin Donut franchise, a professor of managerial finance to graduate students at Johns Hopkins, and serving as an expert witness in finance and economics in court cases all over the U.S. Frederic is also a Sloan Fellow from the Massachusetts Institute of Technology. Find more about Frederic’s work at www.FreshStartScience.org.

The biggest mistake businesses make when it comes to money is…

Not focusing on cash flow.

Often, they extend credit over long periods, spend on speculation, and run out of cash.


Chris Allison

Chris Allison is a business finance expert, professor, and entrepreneur, and is the former CEO of Tollgrade Communications Inc. where he spent 16 years taking the telecomm venture from tech startup to publicly traded company with a market capitalization of $2 billion. During his tenure, Tollgrade was named one of the Best Small Companies in America by Forbes, Fortune, Business 2.0, Bloomberg Personal Finance and Industry Week. Chris now devotes his time to shaping future business leaders as Entrepreneur-in-Residence at Allegheny College, where he teaches entrepreneurship and managerial economics. He recounts his best business lessons in his new book, You’ll Manage, a collection of essays, experiences, wisdom and wit. To learn more about Chris’ work, visit www.chrisallison.biz.

The biggest mistake businesses make when it comes to finances and money…

Not billing promptly the day the product or service is delivered.

A lot of companies issue invoices a couple of times a month rather than issuing the invoice the day the work is completed, which negatively impacts cash flow. The day the product is shipped or the job is completed, an invoice should be issued. If you wait to issue all of your invoices at once, you are essentially extending your customer credit when you don’t need to. You should also consider 1% net ten payment terms. If your line of credit costs 4-6% in interest, getting faster payment for only 1% is a good investment.


Sung T. Chang(Tek)

Sung T. Chang (Tek) is a Financial Consultant with the New York Life Insurance Company and has 8 years of financial industry experience. Tek currently advises individuals and business owners on a variety of financial matters including tax, insurance, personalized pension, asset protection, and various other investment programs.

The biggest mistake business owners make with their money and finances is…

Re-investing all the income and revenue back into the business.

It is necessary for business owners, just as for non-business owners, to build a cash cushion and to put some aside for retirement. Many of the owners I speak to, and especially if they were in business through 2001 or 2006-2008, all wish they had done better to prepare for the big dips in business.


Manny Skevofilax

Manny Skevofilax is a Partner and Business Financial Consultant for PORTAL CFO Consulting, Inc., and his influence has secured financial stability for businesses across the United States as well as overseas. Manny’s background consists of over twenty-five years of diverse business experience and includes formal bank credit training and service as a Vice President with Comerica Bank, a highly-regarded U.S.-based commercial lending institution. His finance experience extends to various industries including manufacturing, web design and marketing, banking, technology, real estate, educational counseling, and hospitality. In the local business community, Manny serves as a Mentor to the Emerging Technology Centers, helping aspiring entrepreneurs to reach their goals.

The #1 mistake that small businesses make when it comes to finances and money is…

Underestimating the amount of money that it takes to grow their business.

There are stories every day about small businesses that began a rapid revenue growth plan, worked very hard, and then ran out of money. It is easy to manage growth when it comes at a slow, measured pace of let’s say 5% to 10% per year. The need to hire employees, buy equipment, or rent additional office space is generally not rushed. A small business owner can take his/her time and plan accordingly. When rapid growth occurs, let’s say anything above 20% revenue growth annually, the pace becomes much faster. In this scenario, based on my experience, a small business owner needs to understand the following three things:

Understand what your financial statements are telling you right now: your profits, balance sheet and cash flow. Are you currently in an adequate financial position to undertake a rapid revenue growth strategy? What will it cost you to grow?

Do you have the capital resources now to add salespeople and infrastructure? If you do, then you may be able to embark on an Organic growth strategy. That is, do it yourself with existing capital resources. If you don’t, then you may want to go Inorganic; which means that you raise equity or debt or both. Inorganic growth also means that you grow your business by acquiring another business.

Depending on your Company’s existing financial position, if you want to grow organically, you may need to take a pay-cut or forgo your own pay-raises and use the difference to invest into the business. Can you afford it?


Alexis Neely

Alexis Neely is a truth-telling lawyer who has built 3 million dollar plus businesses, sold more than $10,000,000 in products, programs, courses and services both online and offline and experienced the joy and terror of doing it while raising kids, going through a divorce, going bankrupt and rebuilding it all with the right foundation. She is the author of the bestselling book on legal planning for parents and routinely trains other lawyers on a new law business model. She’s currently working on her next two books: You Are Not Your Credit Score and Financial Liberation. To learn more about Alexis and her work, visit www.eyeswideopenlife.com.

The #1 mistake small businesses make when it comes to finances and money is…

Not understanding what they really need early enough in the game and then tapping into all available resources (particularly business credit) to obtain those resources. As a result, they run too thin and hold themselves back from growth, and often sabotage their success.


Neil Maxwell

Neil Maxwell is the President and Financial Advisor for Button Financial. Neil has been in financial services since 2005 and became a Certified Financial Planner (R) in 2010. He has spent his career delivering financial planning in the banking environment, running his own office at a national brokerage firm, and delivering financial planning workshops for a big 4 accounting firm. He has taught numerous financial planning workshops all over the U.S. for top Fortune 500 companies, and has served clients ranging from executives of Fortune 500 companies all over the U.S., to individuals, couples and families in and around Denver, Colorado.

Take it from me as I am building my 3rd business and I have made all of the mistakes and also had a few wins. The number one financial mistake I urge businesses to avoid is…

Not fully and adequately preparing themselves financially for the first three years of business.

The key to managing the finances for ANY small business is to put yourself in a position where you don’t need any money out of the business for 3 years. This sounds extreme but the reality is a small business either fails because of running out of money, or because they make bad decisions with their cash flow. If you don’t have 3 years saved then start working towards that goal. Pay off debt, lower your monthly expenses by downsizing cars etc. and have as much in cash as possible. If you are lucky enough to have a spouse that will also work a traditional job and can carry the benefits for the family for the first few years, then you will have a head start on others.

Think of it like the gears in a car. It takes way more energy (gasoline) to get the car moving than it does to keep it going (on the highways). So your MPG is much higher once the engine has done the work to get it up to speed. The same is true in starting a business; you will have to put much more energy into getting the business started than you will to keep it going down the road. The difference is that most businesses won’t be going highway speeds for 3 years or so.


Scott L. Girard, Jr.

Scott L. Girard, Jr. is co-author of the “Crash Course for Entrepreneurs: Business Finance Basics” (Nova Vista, March 2014) and select titles of the Crash Course for Entrepreneurs Series. Scott is also the Co-Founder and Editor-in-chief of www.ExpertBusinessAdvice.com. Before joining Expert Business Advice, Scott Girard, Jr. was executive vice president of Pinpoint Holdings Group, Inc., where he directed multiple marketing and advertising initiatives. His vision and work were also pivotal in the growth and development of Bracemasters International, LLC.

The number one mistake small businesses make when it comes to money is…

Simply failing to financially plan.

This common mistake transcends prospective businesses, startups, growth models, sustainment models, small and large businesses, private companies, publicly traded corporations, etc., and can infect and bring down even the most brilliant of business ideas. The key to defeating this common financial mistake comes down to two things: conservative estimation and aggressive planning.

The vast majority of businesses, especially startups, simply run out of money before they can get off the ground, although this can also happen in an aggressive growth plan. This either boils down to a liberal estimation of the marketplace, or a liberal estimation of expenses. Either way, the entrepreneur failed to predict expenses, or their market test (assuming they conducted one) produced inaccurate results.

We encourage new and prospective entrepreneurs to “test the waters” for as long as they can before they go diving right into business. Especially if it’s a new market to them or this is their first swing at entrepreneurship. “Moonlighting” is popular these days because it allows the entrepreneur to test their product or service in the market conservatively, while not abandoning their soon-to-be-former stream of income.

The other half of this too-common mistake is over-spending to get the business up and running (or growing) as quickly and “shimmeringly” as possible. In the interest of conservative spending when it comes to your operating budget, we advise entrepreneurs to over-plan the budget but strive to operate on a shoestring. If you’ve taken out a loan to get your business up and running, it was likely a huge pain and a major milestone for your business. Don’t fall into the trap so many other do and go purchase a brand-new company vehicle, state-of-the-art technology, and new awesome office space in the middle of downtown. Beyond asking yourself if you need the items in question, ask yourself if you need *these* items.

Bottom line for avoiding the most common financial mistake for businesses, regardless of the size of your business: estimate conservatively and plan aggressively.


Robert Mascia

Robert Mascia, CFBS is a certified family business specialist. With over 15 years of financial management experience, he and his partners at his firm, Green Ridge Group: Business, Estate and Wealth Strategies, council clients on partnership, succession and estate planning. He is a registered representative of and offers securities, investment advisory and financial planning services through MML Investor Services, LLC. Member SIPC; 1140 Rt. 22 E, Suite 202, Bridgewater, NJ 08807 (908) 704-1800.

The biggest mistake businesses make when it comes to money and finances is…

Not preparing a proper exit strategy.

It is interesting, that when I speak with most business owners, their main retirement source is going to be the business they have built. However, most do not have an exit strategy. They have not prepared their business, themselves, or their successors to properly work their way toward their Margaritaville they call retirement. In advising my business owner clients, I have them think about a few things:

  • Value: What is the value of the business that you built. Speak with a professional valuation expert on this. If it is family succession planning, internal transfer to key employee(s), or an external sale, we need to plan with a valuation of the business. Limit the write-offs and make sure all dollars are accounted for and paid tax on. Showing higher revenue for an external sale should pay off in the end.
  • Come up with a game plan: Identify your next move. See what you have personally, what you need to live the life you want, and from there you can identify the gap that the sale of your business needs to fill.
  • Communicate and teach: Make sure if it is any sort of internal transfer, your family and the people involved know the next steps. Make sure they want the job, they know the job, and they are properly trained for the job. Often an owner has one thing in mind and the successors have another. Get on the same page.
  • Have a contingency plan: What if the variables change last minute? Work with a succession planning expert so that your retirement isn’t compromised due to poor planning.


Dave Bird

Dave Bird is the Founder and Director of Online Mortgage Advisor, an independent professional online mortgage resource and search engine, which has been developed and contributed to by independent mortgage advisers and experts.

For me, it is too often the case that business owners make the common mistake of…

Not being able to differentiate between revenue and profits.

Revenue (AKA Sales and Turnover) is the total of the money that flows into your business from sales. Profit is the different between the revenue and the overall costs to the business.

I’ve known it to happen numerous times where new start up business owners or real estate investors remortgaging their own homes to raise funds for new projects because they have become overly excited by potential revenues but don’t have the experience to fully account for all of their costs and all of the potential risks.

Remember to not confuse revenue with profits. The only indicator of commercial viability IMO is profits and revenue is only useful as part of the formula to calculate profits.


Ellen Rohr

Ellen Rohr, The Plumber’s Wife turned Business Makeover Expert, teaches the few things that make all the difference to your business success: Easy financial clean up, profitable pricing and powerful business planning. Ellen is a successful franchisor, helping launch a plumbing franchise to 47 locations and $40 million in sales in under 2 years. Now, she is the president of Zoom Drain and Sewer, LLC, a new franchise company launching in Summer 2014. She is a columnist for Huffington Post, PHC News, and a contributor to many business journals and trade magazines. Ellen is also the author of four business basics books: “Where Did the Money Go”, “How Much Should I Charge?”, “The Bare Bones Biz Plan”, and “The Weekend Biz Plan”. To learn more about Ellen’s work, visit her website www.barebonesbiz.com.

The #1 mistake small businesses make when it comes to finances and money is…

Not charging enough. In many cases, they are not charging more than it costs without even knowing it.

If you don’t know how much you need to charge, you can be tempted to lower your price. If you aren’t sure where the bottom of the lake is, you may risk it. If you do know, then you can confidently walk away from a sale if it’s going to cost you to make that sale.

There’s a success secret about making money in business. Here it is: You’ve got to charge more than it costs.

I urge businesses to ask themselves: Do you run accurate financial reports every week? If yes, then you know your costs and you know if you are making money. Or…are you cliff diving…at night…hoping there is enough in the checking account to cover this week’s bills? Maybe you know you should keep better track of the money, but you keep putting it off because you are:

  • Too busy?
  • Afraid?
  • Financially illiterate?
  • ….all of the above?

Get over it. It’s time to clean up the “slinky-knot” mess you may have made of your accounting program. As the owner, you’ve got to know because it’s your money.

Get the financial reports current and accurate. Then, crunch the numbers. Put a simple budget together. Add up your costs of doing business and then come up with a top line sales goal that covers your costs and leaves you with a profit.

How much profit is up to you. (Isn’t it nice to be the boss?) Use a pencil and a columnar pad, or a simple budgeting program. If you are just guessing at your costs, you won’t have a clue as to how much you need to charge. You could be swayed by your knuckle headed competitors who haven’t crunched the numbers either. You might be tempted to try and match their price. (Really…how do you know that they are making any money?)

If you are priced properly, you are probably going to be the high priced provider of your goods and services. You’ll be in good company. Notice where most market leaders are positioned when it comes to their pricing. Starbucks, Coppertone, Merry Maids, Band-aids, Charmin – these winning businesses leverage the value of their products and services and skip selling on price.

Put a Budget together. Come up with a winning selling strategy and goals for Sales and Expenses. Now, you’ve got a good game to play. Sell enough at the right price and hit your Sales and Profit goals. That’s how you win. Be willing to charge more than it costs. You are a sales professional. Help people solve problems. Sell value and love and friendship. More sales at the right price = lots of money.


John Orlando

John Orlando is the CFO of Centage Corporation, and has 25 years of experience in finance, accounting and administration. He has extensive experience working with both high growth Fortune 500 companies and start-up businesses. Prior to Centage, John served as Group Director of Planning & Analysis at WearGuard (subsidiary of ARAMARK) where he was instrumental in driving profitability via restructuring, cost containment and margin improvement initiatives.

The number one mistake small businesses make when it comes to finance and money is…

Not having a sound budget or forecast to base their operations on.

This often leads to one of two scenarios. The first is bullishly building out an infrastructure /fixed costs structure that is bigger than the actual incoming cash or receivables can handle. The second is that underestimating expectations and be short resources (materials, labor, etc.) to fill orders and generate cash.

To be successful, small business owners should keep one fundamental philosophy in mind, ABC – Always Be Checking Cash! Sure, sounds simple in theory, but often a challenge in reality.

Cash is the lifeblood of any organization, and the Statement of Cash Flows is the barometer by which management, lenders and investors measure the strength of a company’s cash flow. The ability to produce accurate and timely cash flow statements, and to perform analysis based on those accurate and up-to-date reports, is highly critical for assessing both the current health of an organization and making key business decisions. Knowing the timing, amount and predictability of future cash flows should be an essential component of the budgeting and planning process at all companies – not just high-growth and highly leveraged companies. Armed with this information, financial leaders, across organizations, are empowered to make strategic long-term decisions about their business and ensure long term success.

 

Direct Capital offers a variety of finance options for small businesses.

 

 

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2 Comments on "33 Finance Experts Reveal the Number #1 Mistake Small Businesses Make with Money and Finances (and How to Avoid It)"

  1. Bill Black April 30, 2014 at 8:27 pm ·

    This is a great compilation of advice for any business owner. Very powerful tips and ideas. Thanks!
    Bill Black
    Founder & Host
    ExitCoachRadio.com .. 1 minute tips for age 50+ business owners

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