Assumptions, Lack of Knowledge and Hubris – Don’t you get caught!
There are thousands of posts about clever successful business owners, but becoming successful takes practice, and often leads to blunders along the way. These are some very common Dumb Financial Mistakes, in random order, for you to consider, laugh at, or commiserate with.
11 Dumb Financial Mistakes of Business Owners
1. Self Deception
Money is money, no-matter the form. That is the point about money; $1 in your wallet has the same value as $1 at the bank, as $1 on your credit card. However it seems new business owners especially, tend to believe some money is worth less than other money and value money differently depending on where it comes from. Investor money, Tax Refunds or Grant are often quickly spent as it is considered “found” money and therefore spent more recklessly than the $5,000 you worked hard to earn on the job.
e.g. Spending an extra $3,000 on a $200,000 piece of machinery isn’t spending any less money than an extra $3,000 on a $2,000 Laptop – money is money.
Every dollar invested in the business is a dollar that eventually had to be repaid. There is no such thing as a free lunch!
From an accounting perspective, repayments are only ever made from profits, and profits comes from sales less expenses; therefore sales need to be sufficient to cover all your everyday business costs AND make your repayments. So remain mindful when agreeing to borrowing or investment terms that don’t match your projected profit flow. Remember repayments are only possible if your business is running well, so finding the healthy balance between set-up spending, reinvesting and expansion spending PLUS leaving enough for repayments is critical to long term survival.
e.g. If it looks like it will take two years to turn a profit from the first day, then make sure your repayment terms are deferred for at least two years as well.
a) Compound Interest is adding to the overall amount of money you borrow. If you have borrowed $10,000 it is also attracting interest, at say 10%p.a. annually you will need to repay $12,000 in two years, an extra $2k you need to include as part of your repayment plan. Importantly, if the interest is compounding monthly you will need to repay $12,203.91, which is another $203.91 more than if the interest is at a flat rate. So get very clear up front how your interest will work so you can repay it all.
b) Inflation is eating away at the overall buying power of each dollar. As inflation kicks along it creeps up the prices of all your expenses each year therefore year on year you will need to also increase your prices, just to stay in the same place. If you are worried about changing your prices check out Price Hikes are Vital.
Know which way your Reports are rounded. Nice even numbers might be prettier to read, but be sure you know what is what is it up is it down, was your annual $19,999 electricity rounded DOWN by $9,999 to become $10,000 on your year end report because the rule is “round DOWN to the nearest ten thousand” instead of the number being rounded up by $1 to $20,000 (while this may seem dumb, trust me I have seen it happen). What different decisions would you make if you understood it was almost double what you were being told?
There are many costs that get hidden or overlooked, here are two varieties:
a) Costs that are overlooked. “The new staff member will cost $100,000 because that is the salary we are offering”…. WRONG!
The same new staff member will also need to have Superannuation (a 401K) and insurances, taxes such as payroll tax, administration of their payroll, a desk and seat and telephone etc etc etc….Get advice on ALL of the related, and flow-on costs when making a change to your business.
b) Costs that are incremental. There is a point up to which you can push the limits then things break…. knowing that point is critical. What is the total capacity you can extract from your staff, production machine, page size before you need to upscale? You need to know when you can’t deliver the next 1% increase in production because it also requires a new machine (and two new staff to operate it which will also require a move to new premises) then perhaps you are best forging this extra order until you are able to accommodate it more easily.