Using your mistakes to your advantage

Undercapitalisation and cash flow

It can be challenging to have enough operating capital, regardless of whether you have a small or large business. Even if you have been comfortably operating with plenty of cashflow, all it can take is one client with high billables who don’t pay on time, and you can be in hot water pretty quickly. Avoid the risk of undercapitalisation by being more conservative with your project estimates. A good rule of thumb for small businesses is estimating what you think your costs will be and then double it. It’s better to be safe than sorry.

Putting all your eggs in one basket

If you are finding that your business is undercapitalised, what you may be seeing is that your client base isn’t really diverse enough. This may mean you’re putting too many eggs in one basket if too much of your businesses income is dependent on a single client paying on time. To avoid this issue in the future, try to diversify your client base and attract new clients. Also consider introducing projects and milestones and intermittent invoicing into your operations too, that way you don’t have to wait as long for cashflow.

Losing track of the numbers

Poor accounting practices is also another common mistake. Inaccuracies can mean that you don’t truly understand how much a job or project really costs. You are also at risk of overestimating cash flow which comes with its own set of issues. There can also be legal ramifications if you reported inaccurate income or didn’t pay enough taxes. Once you manage to realise your mistake, it’s pretty easy to figure out for yourself that maybe you haven’t been paying close enough attention to the numbers, If you don’t have the time or the know how to do things properly and above board, this can mean that it’s time to outsource and hire a professional to help you out.

Expanding too quickly

As your business grows, it can be very tempting to start expanding as soon as it appears that you are able. Suddenly you feel like you can finally upgrade your computers, hire new staff or invest in a new workspace. But whatever you’re tempted to do, expanding as soon as you can afford it can be a real recipe for disaster. Expansions often mean an increase in your overhead costs, which dilutes your available cash flow. This isn’t automatically an issue, especially if you can guarantee consistency of cashflow. But if it does not, you could find it hard to cover all your new expenses. Avoid the risk of doing this by making conservative forecasts and delaying expansions until it is absolutely necessary.

Pricing too low

Financial mistakes can always be made, even if your systems and processes are sound. One example of how this can happen is by pricing your products too low. Unless you’re at a Kmart level of size and success, it’s generally safer to sell fewer units at a higher price than to sell more at a lower price. High prices protect your margins, as well as has the ability to enhance your brand. Even just a 5 to 10 percent increase in prices can help make a decent difference to the bottom line. Find ways to differentiate your company that don’t have to involve lower pricing (or at least not entirely).

Financial mistakes are pretty unavoidable, even for the experts. But it’s how you bounce back and what you learn from them that matters.