Mistakes in finances that put a business at risk
Here is an entrepreneur opened a business. Developed a sought-after product, conducted market research, found its target audience. Passed packaging courses and made a cool website, hired cool sellers.
And in less than three years the company closed. That’s the end of the tale.
And this is not fiction, but statistics: 97% of small businesses are closed within three years. Most likely, the percentage would be much less if, in addition to sales, innovation, marketing and packaging, entrepreneurs paid more attention to finance. Therefore, we asked the chief editor of “Neskuchny Finances” Ilya Eremin to help understand the financial nuances of business. His word!
Hello! In this article I will talk about five fatal mistakes of entrepreneurs that can cost them business.
They think that sales growth will lead to an increase in net profit.
To earn more, you need to sell more. At first glance, this is logical. According to this logic, entrepreneurs are chasing revenue growth. Often this works, but often and negatively affects the company – there is more work, and profits are falling.
Increasing sales requires additional costs for hiring and salaries of new employees, expanding sales areas, increasing the advertising budget and so on. At the same time, the average check is reduced, because in order to reach new customers, you need to lower the price. As a result, revenue growth rate is lower than expenses growth rate.
Take for example a hardware store. For a couple of years, the owner worked fine, reached net profit of 450,000 rubles. per month. It would seem that life was a success! But it became boring.
The owner decided to scale the business to earn more. I found money: I took part from the reserves of the company, part from the bank. And he opened five more stores throughout the city.
None of the new stores fired in the same way as the first – in some areas of the city the demand was lower, in some – the competition is more serious. But in general, scaling went fine: the network reached the revenue of 10 million rubles. per month.
But spending rose even faster. And the average bill has decreased. As a result, the network earns 100,000 rubles. less than a separate store. In this case, six times more work.
Take too much money out of business
You can take it out of business no more than the business has earned – everyone understands this. But few people correctly consider net profit. Typically, entrepreneurs argue like this: what is on the accounts, then you can take it. And then the money ends abruptly, the company falls into the cash gap, we have to urgently look for money.
Money on accounts is not always the company’s profit. Not even that. Money in accounts is almost never a company’s profit. Profit is not about money at all, but about obligations.
Remember: money becomes profit only when the business has fulfilled its obligations.
Take web studio as an example. She concluded a contract with the customer to create the site and received an advance payment. Prepayment is not revenue, it is simply the money of the customer, who kindly provided web studios for use. This money becomes revenue only when the studio has leased the site. Then you can use this money with a clear conscience.
But the owner of the web studio did not know this. He was delighted with a large order and rolled up a cheerful corporate party for his employees. There were quests, smoothies and music. And after a couple of days the customer called: he said that his company had a hard cash gap, and since the studio had not yet begun work, the money needed to be returned.
Remember the main thing: you need to calculate the profit on the fulfilled obligations, and not on the money in the accounts.
Earn profit in receivables and stocks
A business can be profitable on paper, but in reality, sit without money. This is due to the fact that profit is not necessarily money. She also has other states of aggregation: accounts receivable, stocks in stock. Just like water, which can be in the form of liquid, ice and steam. The essence is the same, but the properties are different.
Accounts receivable are customer debts to you. For example, you have a printing house and you give customers deferred payment: fulfill the order, and they pay it after 15 days. When you have handed over the order, you record the revenue – you fulfilled your obligation. But you have not received money for this order yet – they are in the receivable. There is revenue, but no money.
With stocks a similar story. Their purchase is not an expense of the company, but simply the transfer of an asset from the aggregate state “Money” to the aggregate state “Stocks”. Problems arise when stocks become too much, and there is nothing to pay salaries to employees.
This was the case with one cosmetics company: profits grew month after month, and the owner invested too much money in replenishing the warehouse, and therefore constantly fell into cash gaps. Although the company reportedly grew rich.