As a commercial lender for over 30 years, I have seen countless business owners take control of their financial future only to veer off on a path they had not intended. The biggest mistakes they make? They often lack access to capital, financial discipline and a realistic understanding of what it takes to be profitable. In my observation, the success rate of a small business is incredibly dependent upon the owner keeping a close eye on their finances and following these five cornerstone truths.
1. Truth: Without a Bottom Line, You could Find Yourself in Serious Debt
Knowing how much you make is the easy part. Keeping track of what you are spending is what often causes a business to fail.
Tip for the Taking: Create an annual budget and manage to the bottom-line. For each event you book, gain a clear understanding of the costs associated with delivering your services for the event. It’s not just limited to expenses related to the day of the event, but the costs leading up to securing the event, marketing, fixed costs to running your business, insurance, office operations and future replacement of equipment.
2. Truth: You'll End Up Scrambling for Cash If You Don't Plan for the Extras (ie, Capital Expenditures)
When an unforeseen expense happens, those who did not plan scramble to find cash, often at a high cost or ultimately close up shop because in their own words, they "did not see it coming.”
Tip for the Taking: Save for the future by planning on putting aside 5-7 cents of every dollar in revenue, to ensure you have working capital for long-term growth. This also can be allocated for unexpected expenses such as equipment replacement or short-term cash flow during slow periods of the year.
3. Truth: Discounting Your Services Can Erode Your Bottom Line
It's easy to get caught up trying to win the sale without evaluating the short and long-term impact to your bottom line. An occasional discount will not have a significant impact, but long term it will erode your profits quickly, resulting in a negative cash position of the business.
Tip for the Taking: Set the price of your services based upon the budget you’ve created at the beginning of the year. If you choose to discount, then you need to review you expenses and adjust them accordingly.
4. Truth: If the Financing Seems Too Good to Be True, It Probably Is
Easy access to working capital is often a deal too good to be true. Small business owners are primary targets for predatory lending. Banks and credit cards with low interest rates should be your primary source for capital. Keep accurate and timely financial records of your business so applying for a traditional bank loan or credit card is not a painstaking process. Try to avoid the following two (2) types of loans:
- Pre-approved loans from non-traditional lenders such as finance companies. They often result in rates between 20% -25% and higher-than-average loan fees.
- Loans in which payment is based upon future credit card revenues. These loans are usually short-term in nature, with a fixed pre-determined monthly payment based upon historical credit card transaction volume. It can translate into the lender taking up to 65% of your merchant receipts on a weekly basis with an effective interest rate exceed 25% and greater.
5. Truth: Protect Your Core Business Model and You'll Safeguard Your Company's Longevity
Entrepreneurs are prone to adding other sources of revenue to grow their business, and in many cases it can be successful. For example, many DJs, photographers and even event planners have invested thousands of dollars in photo booths. The thinking there is that they'll be able to quickly increase overall profitability. The problem is that photo booths have become a commodity with a race to the bottom in terms of price point. Now those same professionals, not only are trying to recoup their initial investment, they also find themselves faced with a slew of other costs associated with running photo booths.
Tip for the Taking: Take on new opportunities but to avoid eroding your core business, don't just focus on the revenue. Assess the overall impact to your bottom-line and spend time thoroughly investigating what it will cost you in capital to start up this new service. And don't forget the additional expenses to deliver the service, both from a fixed and variable cost.