It’s one thing to launch a business, another thing to grow it. For the ones who manage to rise from solopreneur or mom-and-pop to actually running a viable organization, the accompanying financial challenges can lead to some very short-sighted decision making. As the saying goes: you never know how poor you are until you start making a little bit of money.
To help you avoid making rookie financial mistakes as your business scales up, here are 10 blunders others have made that you shouldn’t double-down on:
1. Championing Revenue over Profit
Entrepreneurs are a competitive tribe. As your friends achieve success and boast of becoming, say, a $10 million company, it’s only natural to want to match that accomplishment — so you start doing whatever you can to top that number. Big mistake. More often than not, in the scramble to compete with friends or business acquaintances, you’ll overlook what could be a smaller-but-more-profitable business buried just below the surface of your growing enterprise. Rather than worrying about what others are doing, focus on reducing costs and increasing efficiencies — because a dollar in bottom line profit trumps a dollar in top-line revenue seven days a week.
2. Rushing to Diversify
As the money starts to come in, the temptation will be to diversify into areas outside your core competency. Don’t do it. You grew to this point by understanding the intricacies of your business. Investing in someone else’s business in another industry requires a whole other skill set that you don’t possess and probably don’t have time to learn. A much smarter play is to park your money in cash. As a business owner, liquidity is your strongest ally. Your number-one investment should be your business; so, take that excess cash and start building a war chest for when your business needs it most, or when that perfect opportunity arises, such as acquiring a competitor that complements your operation.
3. Funding that 401k
The idea here is that you’ll defer income for retirement so you can save on taxes. But every dollar you sock away is a dollar that could have funded your business’ growth. It may seem like a fair enough trade-off, but every time your 401K balance drops, it’ll feel like a slap in the face. This feeling will only be compounded by the realization that your account’s overall health is largely out of your control, at least compared to the ongoing investments you make in your business, which fall completely under your control.
4. Ignoring the Appropriate Value Equation
Money goes where it’s treated best. As Garrett Gunderson, business strategist, best-selling author and self-admitted “Money Nerd” recently told Forbes:
“The two greatest forms of capital in a business are the mental capital (your product and service expertise) and relationship capital (your audience, platform, organization, clients, family and friends). Mental Capital + Relationship Capital = Financial Capital. When these factors are in balance, the organization can shine. When they’re not aligned, however, the effort to work harder on a bad philosophy will not produce good results. Bad outcomes occur when you see an owner living outside of their means attempting to run the business like a treadmill as a means to keep up. Or perhaps the owner is attempting to run a value proposition that worked for someone else or for another set of customers, but isn’t well suited for them, such as the dentist who attempts to sell real estate investments on the side, or the marketing consultant who suddenly decides to use revenue from marketing services to own and lease private jets. When the business fails to match its value proposition to its natural platform and audience, things will seldom go well.”
5. Undervaluing Human Capital
The vast majority of successful entrepreneurs pulled themselves up by their own bootstraps. So, it’s understandable that you’d want to squeeze as much value as possible out of every dollar when it comes to hiring people. But hiring on the cheap is not the way to go. Focus instead on hiring the best person for the role you wish them to fill. And don’t skimp on the technology or expertise that will enable them to cut costs and increase efficiencies as your business grows.
6. Accepting Vague Belt-Tightening Advice from Advisors
Just as many lawyers will steer business owners away from doing deals in order to avoid risk (despite the fact that you took a huge risk by starting your business,) many financial managers promote a general aversion to spending. These are the people who are forever urging belt-tightening but can never pinpoint where exactly you should cut back. Basically, they’re coming from a scarcity mindset instead of an abundance mindset. Rather than going that route, focus your energy on running your business and growing.
7. Mistaking All Debt for Bad Debt
As the business owner, your goal is to generate cash that can be spent to grow your business. Most entrepreneurs apply any excess cash to paying the bill that’s due next, or toward the highest interest cost on their balance sheet. A smarter approach, according to Gunderson, would be “to take the loans you have, divide by the monthly payments, and apply your cash to the item that provides you with the lowest cash flow index first. Credit cards have the lowest cash flow index, meaning that if you pay them first, it frees up and improves your cash flow the most.” What’s really important here is understanding the relationships between cash flow and credit, or your debt to income ratio (DTI). Ultimately, your DTI will determine the interest rate on any loan you qualify for, so fully grasping these relationships is vital.
According to the Forbes article, “For businesses, an even bigger idea Gunderson suggests is to go for 3-6 months paying only the minimum amount on each debt and apply the additional money to the area of the business that is currently most vulnerable instead. He calls it a 90 Day Debt Delay. ‘It will ease their stress and improve their business far more than the benefit of paying down the equivalent amount of money in debt,’ he suggests.”
A growing business brings challenges that many entrepreneurs aren’t prepared to manage. But if you avoid the seven mistakes outlined above, you should steer clear of financial wreckage.