Securing a loan is a breath of fresh air for a business, especially if one is experiencing financial struggles. With the money, investments can be made; inventory can be purchased; and the operating capital can be replenished. This is what business owners want to do. But in the real world, a lot of businesses get too complacent or impractical with their spending upon receiving funds.
Let’s face it, a sizeable sum of money can make some people lose focus on their business goals and find themselves putting their proverbial financial eggs in one basket. Worse, they mismanage the entire fund, which leads to even bigger financial problems. Which is why we came up with seven of the common money mistakes organisations make when they get finance.
1. Mixing Business and Personal Funds
A business is a separate entity from its owners, and it should be treated that way especially when it comes to handling cash. A business loan can amount to more money than what the company needs for its immediate investments or expenditures. Ideally, the excess cash can be stored as additional capital for the organisation, since emergencies can arise at any time and the ever-changing trends on the market can lead to a sudden influx of investments.
Another problem that could arise in mixing personal and business funds is taxation. Owners will have to determine which purchases are deductible to the business, and personal expenditures shouldn’t be allowed that luxury. Otherwise, when the company gets audited, the owner will get a call from Taxation Office and that is one headache you don’t want.
Securing succeeding loans can also become harder if you weren’t able to pay it on time because you used it for personal expenses.
2. Expanding Prematurely
There is nothing wrong in diversifying one’s portfolio of investments. It is a healthy practice for people who want to increase revenue streams, all while maintaining a steady stream of profits or income. The last part is where some business owners tend to falter. Flush with capital and finance, owners want to expand the business in every possible direction without putting prior focus on expanding their profits within the current spectrum of operations.
Every new direction that a business takes, leads to new expenses, new markets to penetrate, and new strategies for sales and marketing. Without a strong financial base or at least a consistent inflow of sizeable sums, the collective failures in branching out could financially paralyze the company. And the loan might not be enough to save it. Focus on improving the products, marketing efforts and increasing sales, first, before considering expansion.
3. Not Allocating Enough Funds to Reduce the Owner’s Tasks
It’s good that an owner is engaged in the business’ operations. With the owner leading, system errors quickly get addressed and the staff are compelled to work better. But getting too involved could deny the organisation opportunities to earn. This highlights the importance of allocating funds for staffing as well as tech solutions that can reduce work and maximise productivity, like open source project management platforms and automation.
Hiring a “bargain workforce” to preserve the acquired funds isn’t advisable as well. Sure, these people will take on the work, but the outputs that they will produce might not live up to what the company needs. Worse, they may need to undergo extensive training programmes, which are quite costly, to produce the desired results.
If possible, companies should go for the best people available. They can turn a struggling company into a financial success.
4. Overlooking the True Product Cost
Upon securing money from business lending, manufacturers and food establishments use the money right away to purchase goods and replenish their inventory. There are no problems there, unless a company does not take into account all the costs involved in creating the finished products. That includes overlooked factors like the transportation and the cost of utilities.
These uncovered costs, often lead to a flawed pricing scheme, may silently eat away the business’ profit margin. As a result, you only get marginal profits or worse, losses. The loan will simply dry out with limited benefits in this case. So, what are these expenses that are often overlooked? Here are a few samples:
- Fuel consumption
- The cost of utilities (electricity, water, etc.)
- Fare in procuring raw materials
- Unsalable items/wastage
- Damaged/spoiled materials
- Employee payroll, benefits and taxes
- Sharp and sudden fluctuations in the cost of materials
The objective is to be on top of the business’ actual gross profit and to apply a pricing scheme that yields ample profits without being too costly for the target market. In doing so, youc an allocate the loan to the organisation’s every need.
5. Being Too Passive with Passive Income
As stated by renowned author and speaker Robert Kiyosaki, acquiring passive income is a sure-fire way to expand profits. The problem is, some simply drop funds for an investment, and then leave the whole thing unmonitored thereafter. Without supervision, occurrences like sudden fluctuations in interest rates, better deals from competing firms, or insolvency might arise. Managing passive income doesn’t entail too much work, so taking care of the revenue whenever possible shouldn’t be too much of a problem.
6. Not Focusing on Business Infrastructure
Systems govern the internal processes of a business. A company that doesn’t look into improving its infrastructure will not likely perform at full capacity. That is is why a large chunk of the finances should be devoted to improving the business infrastructure. Apart from staffing, a part of the loan can be used to:
- Upgrade computer systems
- Introduce more efficient computer systems
- Hire seasoned accountants
- Hire a corporate lawyer
- Obtain business programmes that provide organise inventory, daily tasks, costs, suppliers, and purchase orders, among others.
- Secure the services of a financial advisor.
- Consult with an insurance broker
- Find better suppliers
The exact elements of the infrastructure are relative to the industry and the business model followed. The point is the business system, along with its web of departments and procedures, should function like a well-oiled machine and cover all bases, including employee benefits and potential court cases in the future.
7. Not Seeing the Loan as an Opportunity to Raise One’s Credit Rating
An unfavourable credit rating isn’t etched in stone. Many individuals and businesses have recovered from it, and now have access to bigger loans with better interest rates. What a business owner can do is to allocate a part of the loan for credit card payments and the most financially vulnerable areas of the business, eventually leading to the improvement of the firm’s debt to income ratio.
Truth be told, a good amount of money is needed to cover all business needs. Expenses should be planned beforehand to avoid the aforementioned money mistakes. Securing a loan shouldn’t be too tedious and time consuming. Today there are a number of alternative lending platforms and related FinTech solutions. Companies like Capify provide a non-stringent, easy-to-secure scheme in the merchant cash advance for individuals and businesses that immediately need financial support.