Some of the biggest financial mistakes made by entrepreneurs will shock you.

Research carried out by the U.S. Bureau of Labor Statistics found that around 20% of new businesses close within the first year; and over 50% shutdown after 5 years, while 70% fail after 10 years. This might come across as shocking to you, but unfortunately, that is the reality of the business world.

You might be thinking, why are these businesses failing? While these may be attributed to a number of reasons ranging from poor market research to external issues such as instable political environment, in this post we will focus on one. Financial mistakes or errors. 

Before I go deeper into how financial errors can cause a businesses to fail, I will like to say this…Sis, I am proud of you…just in case no one has told you, you are doing well. Starting a business is no easy feat. Entrepreneurship is not a regular 9-5 gig where you close up shop at a certain time. This is 24-7, round the clock work and we are proud of you for taking the bold step and starting anyways.

The Cash Flow Struggle: David Vs Goliath

Okay, back to our discussion on the 3 biggest financial mistakes new businesses make that can potentially lead to their failure and how you can avoid them.

Negotiation Power with Banks and Creditors

Lack of financial expertise and skills has caused a majority of businesses to fail, though big businesses can bounce back from these kinds of mistakes, micro and small businesses often don’t survive it. The reason they do not survive it is because they do not have the same negotiating power with the banks or creditors that bigger businesses do. 

Think about it for a second, a neighbourhood grocery store  might not have an established credit history and will struggle to secure a loan from a bank. This limits their ability to access capital for growth or to weather unexpected financial setbacks. While a known mall with branches in major cities may have no issues securing additional financing from a bank because their credit history is well known.

A startup clothing company may be forced to accept a loan with a high interest rate due to their limited credit history. High loan repayments can significantly strain their cash flow and hinder growth potential. If they decide to add the cost of the loan to the cost of their goods, they may become un-competitive in the market as customers will may seek for cheaper options elsewhere. You get where I am going with this?

Customer Base and Cash Flow

Also the grocery store is local and certainly does not have as much customers and cash flow as  bigger businesses do. They rely heavily on their monthly turnovers for rent, staff salary and inventory. So when things go south, they do so horribly.

If the small business is in a competitive market they might struggle to attract customers initially due to their small marketing budget. Bigger businesses on the other hand can set aside a 7-figure marketing budget without losing sleep. Where, pray tell dear sisters, is the basis for comparison?

They can easily be swallowed whole like a fish out of water but I digress.

Build Resilience: Avoid these 3 Biggest Financial Mistakes

If you have been following so far, you may be tempted to think that being a small business, the game is already rigged against you. Don’t do it! Every big enterprise was once a micro or small enterprise. Rome they say was not built in one day.

The beauty about learning from mistakes is that, it does not have to be you making them. There are several accounts of businesses that have failed and the reasons why they failed, posted online. Attending business seminars and workshops is a great way to meet and learn from other businesses.

Reading this article is probably the cheapest and easiest way of learning what financial errors to avoid in your business so you do not close up shop in less than 3 years. I am here to ensure you win, so in no particular order here are 3 financial mistakes new entrepreneurs make and a few tips on how you can avoid making same. 

1. Poor record-keeping

Failure to maintain accurate and up-to-date financial records is the worst thing you can do to your business as an entrepreneur. Financial records provide you with the data you need to make informed decisions about your business.

An effective record keeping system shows you your true financial position because you know what products are fast moving, what supplier you can negotiate lower cost prices and more favourable payment plans with and what changes you should be making to pricing overall.

Maintaining proper financial records will help you effectively track your income and expenses so you can pay your bills on time and meet your staff salary obligations.

If you do not have good visibility of your financial records, you may end up over-paying the tax man and possibly paying penalties and fines when you did not have to.

2. No financial Reserves

You may be on top of everything business-wise with a steady stream of customers, great location, year-on-year profit and then boom! A natural disaster sweeps through your neighbourhood or some sort of nationwide-lock down due to health concerns. What do you do?

Unexpected events like economic downturns, political instability, natural disasters, or supply chain disruptions can severely impact a business’s revenue. Without nice , cozy,  financial cushion, a small business might not have the resources to weather these storms.

It might not even be a negative event but a positive one. Consider a limited-time business opportunity that just shows up. For example, new market opportunities, suppliers offering special discounts on inventory because they want to introduce a new line of products and need to get rid of their current inventory. It might even be a competitor offering you first right of refusal to buy them out because they are just about ready to close up shop. Sis, if you haven’t got the cash on hand to take advantage of these opportunities when they come, you are definitely leaving money on the table.

When  a small business is faced with a shortage or reduction in cash flow, if they haven’t got any savings, they may be forced to rely on creditors. This can lead to high-interest payments that can put additional strain on the business’s cash flow further. Trust me, you do not want to be in this position.

3. Not charging what your product or service is worth

Incase this is news to you, “Not charging what your product or service is worth” is on the list of biggest Financial mistakes entrepreneurs are making. Have you ever asked yourself why a bottle of water in a hotel costs more than a bottle of water in a store directly opposite the hotel? The bottle of water in the store directly opposite the hotel might even cost more than a bottle of water in a store on the high street?

It’s simple, you are paying for convenience.

If your products are solving a genuine need and addressing issues such as convenience, longevity, exclusivity, seasonal fluctuations, you might want to re-think the prices you have currently got now on your goods and services.

If you undercharge for your product or service, you will most certainly be dealing with lower profit margins for each sale. This means less money, thereby limiting your ability to reinvest and expand the business.

Additionally, when you undercharge, you may be devaluing your offering. Customers may associate low product or service quality to your price. It’s nothing personal, just pure psychology.  This can make it harder to attract and retain high-paying clients.

To avoid undercharging, you need to know your costs by taking the time to accurately calculate your business expenses. This will help you determine your minimum viable price point.

Focus on offering value to the customer at every touch point – online or offline. Figure out an area, you want to stand out from your competitors and focus on delivering value in that area. Do this by researching your market.

If business prioritizes the use of  high-quality materials in it’s manufacturing process, or you go above and beyond to  ethically source your raw-materials, you insist on organic ingredients, these higher production costs should be reflected in your prices. You should not feel bad about it. If you do, then you are probably targeting the wrong market…yea…think about it.

 Conclusion

If you are an aspiring entrepreneur, or maybe you are just a few years in, this is one article you want to bookmark and come back to again and again.

In this post I have delved into the specific challenges faced by small businesses, particularly when it comes to cash flow. As was mentioned earlier, unlike larger corporations, small businesses lack the negotiation power with banks and creditors, and they may struggle to build a financial safety net.

To help navigate these hurdles, this post has drawn your attention to the 3 biggest financial mistakes new businesses make. These include poor record-keeping, failing to build a financial reserve, and not charging what your product or service is worth.

I hope this article has empowered you to avoid these pitfalls and increase your chances of success.

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