The 7 Biggest Financial Mistakes Businesses Make

Running a business should earn you an honorary degree given all you will learn, says Brian Hamilton, co-founder and CEO of Sageworks.

By Brian Hamilton

We live and we learn. In the time it’s taken me to build two companies, I have learned and more importantly, lived, these mistakes. I hope these pieces of advice can help both aspiring and existing entrepreneurs succeed in starting and running their own businesses. Here are the CliffNotes, the mistakes you should hear now and avoid.

1. Hiring in advance of revenue. There is a common expression: “Don’t count your money until it is in the bank.” There is great wisdom in this. Many times in business, we receive contracts or the promise of revenue. However, there is a major difference between having revenue and almost having it. Until revenue actually hits the bank account, you don’t have it, and you must overcome the tendency to be optimistic and hire too many people before the revenue is real. This one principle or mistake could be its own manifesto.

2. Borrowing money when you don’t really need it, but when the bank is willing to lend it. Just because a bank is willing to lend you money does not mean you should accept it. The bank is in business to collect interest and not to optimize your financial performance. Sometimes these two goals meet somewhere near the middle, but it is not as often as you might think. It’s not that bankers seek to take advantage of business people; it’s only that their objectives and yours are very different. In general, borrow as much as you need to grow your business. The problem with credit is not that there is too little available; it is that people get too much of it. Borrowing money adds a huge burden to your business, a stress that can often cascade into your personal life.

3. Not paying payroll taxes on time. I have known few businesspeople who have completely avoided this mistake, but it always creates unnecessary anxiety. When you pay employees, you collect a portion of their money on behalf of the government. Essentially, you are a collection agent. This is a tremendous liability and responsibility for employers that did not exist years ago when employees had to deduct their own taxes and pay them to the government. Alas, these days are over. When you hire an employee, you are also agreeing to help them pay their personal taxes, a major responsibility. Here is how this problem crops up. The employer cuts payroll checks but does not immediately set-aside the payroll liability in an operating account that is separate from the account they use to pay other operating expenses. The funds are mingled, and the person running the business has an inflated view of his or her cash balance. It is not that the employer is being dishonest or intentionally withholding the tax revenue; they lose track of the liability. Later, employers try to play catch-up, but because there is almost never as much cash available as you would like in a privately-held company, the taxes accrue and problems start severe penalties and interest. One solution is to keep two, separate accounts: one for regular operating expenses and the other for payroll taxes. Another solution is to simply use a payroll service that will give the liability its due attention.

4. Pricing too low. Unless you are Walmart or are trying to be (and have a real hope of achieving this), it is almost always better to sell fewer units at higher prices than to sell more units at lower prices. High prices protect your margins and also enhance your brand. Even 5-10 percent price increases can make a significant difference to the bottom line. I believe that, at any given time, 20-30 percent of businesses in a given market cannot possibly make a profit at their current prices—they are simply too low. In a way, these businesses have set themselves up unknowingly as nonprofit organizations. Conduct deep industry research on pricing, and then price at or near the market average—maybe even a little above it. When people start a business, they tend to price low to differentiate their offer. Instead, spend time and develop a real product or service differentiator so you can command higher prices. If you price low at the start and then later have to charge more as your operating costs grow (which they always do), you will offend and lose many of your early customers who think the increase is unfair. Price for decent margins, build and protect a real brand, and maintain your customers to build your franchise.

5. Permitting accounts receivable. Unless there is a good reason, you should not offer credit terms to customers. When you offer credit, you are now a bank and a service or product provider rather than just a service or product provider. It is rare that businesses fail because of profitability (most entrepreneurs know they need revenues to exceed costs); more often businesses fail because they cannot collect receivables and manage cash. Offer credit only when you must do so, and many businesses don’t need to. This goes against commonly accepted practices, but I have seen so many businesses fail due to poor cash flow management that I flinch every time I see smaller businesses offering credit. I realize that everyone reading this will think they need to offer credit to customers, but probably only 25 percent really need to. There is an old inventory management maxim: “Inventory kills.” This is wrong; it should be: “Inventory hurts, but accounts receivable really kill.”

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