Numerous factors come into play when running a successful business. The most important factor, however, isn’t a strong work ethic or easy access to caffeine — it’s smart financial management. Your money-making and spending habits can propel your business forward or drag it down.
Good financial habits translate to higher profits and improved growth potential, while bad habits can result in wasted resources and stalled plans.
If you want to run a successful, sustainable operation, here are eight bad financial habits to break up with this Valentine’s Day — plus what to do instead.
8 Financial Habits to Break Up With
1. Buying Supplies You Didn’t Budget For
Purchasing expensive supplies, equipment, or office furniture without a plan can put you in a tough financial situation. Matthew Ross, co-owner and COO of RIZKNOWS and The Slumber Yard, said he used to have a habit of buying unnecessary supplies for his company, like the latest espresso machine or printer. Part of it, he said, “was that each purchase in my mind was an ‘expense’ or ‘write-off’ that would help come tax season.”
But buying items you haven’t budgeted for, no matter how well-intentioned the purchases, can result in restricted cash flow. This can make it difficult to cover daily operational expenses, as well as plan for long-term growth.
To curb this habit, start by examining your spending. “One thing that helped was that I started reviewing total expenses by line item on a monthly basis,” said Ross. Once you understand what you’re spending, you can take a more intentional approach to company purchases. Ross recommended asking yourself two questions when debating a purchase: first, whether the item is necessary to continue regular operations, and second, whether it will help your business grow.
Certain splurges, like upgraded inventory management software, may be worthwhile investments in your company’s success, while others, like a new sofa for the lobby, can wait.
2. Standing By Old Sales Strategies
Committing to a particular sales or marketing strategy long-term without examining its effectiveness can waste funds and resources. Emily Brereton, marketing director of Napkins-Only, said her company kept spending money on sales promotions that didn’t yield a high return. “We figured that wining and dining current customers would increase customer loyalty,” she said, “but there was little to no ROI for those marketing dollars.”
After realizing the mistake, Brereton’s team had to rethink their approach. “When we switched to corporate gifts at the end of the year,” she said, “clients expressed appreciation and business continued into the new year.”
If you stick to the same sales and marketing methods you’ve been using for years, you might be missing out on potential profits and new opportunities to engage with customers. Brereton recommended examining your spending efforts every quarter. “That way,” she said, “you’re continuously optimizing your spending, cutting your losses, and freeing up your budget for new ideas.”
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3. Ignoring Your Credit Score
The concept of building business credit may seem abstract and confusing, but ignoring your score — and its implications — can set your business back. You may not need financing for your business right now, but actively building your credit can help expand your opportunities in the future.
Ken Wentworth, owner of Mr. Biz Solutions, said building credit is essential to your business’ growth. “With good business credit,” Wentworth explained, “not only will there be more flexible options available to you, but the interest rates could also be much more attractive.”
You can’t improve your status if you don’t know where you’re starting from, though, so it’s important to develop a habit of periodically checking your credit. You also need to make sure “your report does not contain errors that could negatively impact your overall score,” Wentworth said.
With Nav, it’s easy to build a business credit profile and start taking practical steps to improve your score. You can get personal and business credit reports for free, so you’re always up to date. Plus, you can plan ahead by using Nav’s tools to shop around for financing and see how likely you are to be approved.
4. Forgetting to Calculate Hours Worked
If you’re spending more time than you anticipated on certain projects, you may not be making enough to turn a profit. Jason Patel, founder of Transizion, said he and his employees would say yes to every client request — a pattern that resulted in them working unpaid time to get everything done. “New customers were actually costing us more money than we were making,” he said.
That’s why it’s crucial to track the time you spend working. Once you understand how long certain tasks take, you can figure out how to be more efficient while still satisfying your clients and customers.
“We mapped out all prospective client needs,” Patel said, then “added timelines to client contracts, added milestones, and made everything clear up front.” You may need to streamline certain work systems, scale back, or renegotiate with clients to ensure the time you allocate toward projects actually generates a profit.
5. Pricing Products Without Enough Information
When you develop a new product or service, it’s normal to want to introduce it to your customers as quickly as possible. However, hastily pricing your products without reviewing all your financial details is a bad habit. Inaccurate pricing “can lead to landing plenty of business and being plenty busy,” Wentworth said, “but actually losing money.”
The mistake, he explained, is pricing your products or services based solely off gross margin, which is the number you’re left with after you subtract the cost of goods sold (COGS) from your sales. “However, it does not account for operating expenses — things such as rent or mortgage, utilities, marketing, and administration staff salaries and benefits,” Wentworth said.
To ensure your products are priced to improve revenue — and not just garner sales — you need to aim for a positive net profit margin. To calculate your net profit margin, Wentworth suggested the following formula:
Revenue – Cost Of Goods Sold = Gross Margin → Gross Margin – Operating Expenses = Net Profit Margin
It’s a good practice to plug in the numbers and reevaluate your pricing every quarter or two to ensure you’re earning money. Factors like customer demand, market trends, and industry competition, all of which fluctuate, can affect the success of your pricing.
6. Neglecting Work Performance Evaluations
When you’re busy trying to satisfy clients and customers, directing the attention back to your employees may seem low on your list of to-dos — but it shouldn’t be. Figuring out how to optimize your team’s performance is key to connecting with more customers, closing more deals, and streamlining operations.
Kean Graham, CEO of MonetizeMore, said his company starting tracking key performance indicators (KPIs) for each department, then offering financial incentives to employees for meeting those KPIs.
The KPIs you use will depend on your business objectives and will vary by department, but they should all help measure progress toward your overall company goals. For your sales team, for example, the KPIs could be monthly sales quotas and a certain number of new customer leads; for project managers, however, you might use the percentage of projects completed on time.
“Since this implementation,” Graham said, “each team and team member has improved their performance, which has increased company profits.”
7. Choosing a Financing Solution Without Shopping Around
When you need additional working capital, it’s tempting to choose the easiest or fastest financing option. But making decisions without doing sufficient research can cause you to pay more than necessary. Every financing solution offers different rates and terms, so it’s smart to shop around first.
The first step, though, is figuring out what you want to use the money for. Do you need to hire a new project manager? Or acquire more inventory to complete a huge order? Will extra working capital help improve your profits or prevent a big setback? Take a look at your current financial situation, including your cash flow, to determine whether or not you have enough money to make regular payments.
When you look for financing, make sure you have a good understanding of the application process, terms, and rates. It’s helpful to use the annual percentage rate (APR) to compare. Traditional bank loans, for example, have average APRs that start at 4%, while the average APR for a merchant cash advance starts as high as 20%.
8. Outsourcing Without Discretion
Outsourcing certain tasks can free you up to focus on business strategy and client relations, but automatically outsourcing work without evaluating the cost of that work — or the potential time it would take to do it on your own — isn’t smart.
When deciding whether or not to outsource, you need to consider your skills, budget, available time, and the particular stage your business is in. If you’re still growing and have less working capital, you’ll probably want to outsource work based on what yields the highest return.
For example, Kolbaba said, paying for a “billboard advertisement, a sign holder for outside your business, or Facebook advertising” will likely give you more bang for your buck than paying someone to create your business cards.
As you become busier and more profitable, though, you can change your strategy to outsource less critical tasks. “Things like website work, general SEO, writing, and bookkeeping are all activities that take me away from answering the phones, dealing with customers, and anything else that directly makes the company money,” Kolbaba said.
Time to Say Goodbye
If you have a few bad finance habits, it’s time to part ways. Breaking up is tough, but it should pay off. And adopting new habits, like regularly reevaluating your spending, recording your expenses, and building your credit can help your business thrive.
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