The 5 Most Common Financial Pitfalls of All Businesses

Small business, startups, and entrepreneurs often make a few common financial mistakes during every stage of the company’s growth.


At times, resolving them becomes possible through debt consolidation loans for bad credit UK or other borrowing options.


A few of them include insufficient cash reserve, mixing personal and business costs, having a passive receivable approach, impulse and over-spending, etc. Making inadequate follow-ups, undervaluing operating costs, making high investments during the early stages can account, among others.


However, business owners can manage these problems from the first day of operation. Early-onset and a continuous habit of following up with the resolutions can keep the business afloat. It will also bring in regular cash flow.

Solutions for the 5 Most Common Business Financial Pitfalls

●    Insufficient Cash Reserve


A business’s growth depends on the cash reserve that ideally pays off expenses, and payroll, besides enabling to avail opportunities. Under dire financial business situations, the cash cushion help to maintain regular functioning and avoids glitches.


Moreover, businesses often encounter unforeseeable events such as delay in receivables, equipment repairs, or supplier contradictions. Besides this, the economy keeps taking different approaches time and again.


For example, the recent pandemic slowed down the delivery of materials, products, accessories, etc. As a result, business manufacturing became static or even delayed. Cash reserve proves useful, especially during low sale season.


At times, businesses achieve a chance of becoming ahead of their competitors. Owners with a cash reserve can avail these opportunities without having second thoughts. The ideal method of building a cash reserve includes adding larger portions into it during the peak season.


Separating an amount during the initial funding, and maintaining regular cash reserve contributions can also help.

●    Passive Receivable Collection Approach


According to a source, overdue invoices accounted for £6.7bn a year for UK businesses in 2018 due to payment delays. Therefore, passive receivable collection approach leads to either non-payment or payment delays.


Business owners must switch to active methods of contacting and collecting receivables. The ideal approach for the same includes two reminder emails followed by two friendly calls. The next step would include a formal letter followed by a letter informing the solicitor.


If the borrower manages to escape this loop, you should opt for a debt recovery agency, mediation, court action, and statutory demand. Make sure to take the first step of non-payment recovery thirty days after delivering the product or service.


Entice the client for early repayments by mentioning avoidance of late payment charges, building a schedule deduction, or providing lower interest rates.

●    Over and Impulse Spending Behavior


New business owners become more optimistic with results and plans. They fail to recognize unforeseeable instances like drastic market fluctuations, negative trend changes, improved competitors’ products, etc.


As a result, new business owners often over or impulse expenditures on new accessories, new market products and tools, interior improvement, etc. Therefore, the funding of the organization significantly diminishes. So, owners have to outsource work or hire low compensation employees.


Also, the situation worsens if the company incurs significant losses during the first three years. It can lead to bankruptcy, lay-offs, staying behind the competitors, etc. An ideal method to avoid such a situation is to build a business budget with the necessary expenses and initial funding.


Besides this, businesses should leap at the opportunity of an angel investor when the company flourishes. It can increase the funding, get ahead of the rivals, hire recruits, and contribute to company growth.


Furthermore, owners should not mingle with personal and business accounts. The separation helps in bookkeeping, taxation, generating cash flow statements, creating faster forecasts, etc. Also, it helps to learn the costs incurred by the business in a fiscal year, excluding personal charges.


According to a source, a good practice would incorporate twenty per cent of the capital, especially during the establishment stages.

●    Client Credit Extension Without Verification


Small businesses or startups often fall prey to non or delay payment clients by extending credits without verifying the credit history. It creates panic in an organization already incurring salaries, everyday expenses, loan interests, etc.


However, a straightforward approach for startups, entrepreneurs, and small business includes vetting the customers before offering a credit line. Owners that want to increase users can offer strict repayment terms, initiate a centralized system for payments, clear the collection process, etc.


Such practices can increase repayments, even for bad creditors and build a habit of verifying user profile. Another practice of receiving assured receivables includes demanding higher repayments or offering a lower tenure.


Besides this, ask a borrower to clear small debts with a consolidation, payday, or bad credit loan to assure regular repayments. However, to understand the credit history of any profile, the owners must conduct a credit check.

●    Creating Bad Contracts or Agreements


Agreements and contracts remain binding with the company, clients, customers, suppliers, and employees. It means they become subject to change only after negotiation from both sides. Unfortunately, many entrepreneurs and new businesses fail to develop good contracts or agreements.


As a result, the signer may take advantage of the loopholes if things didn’t go well with the organization. Company owners should assure a binding contract that subjects to receive payments for the goods or services delivered to incur continuous cash flow.