How to avoid these 5 unforeseen financial pitfalls

October 26th, 2020

Protect your small business’ financial future long term by avoiding these common pitfalls.

Many up-and-coming entrepreneurs worry that they will make mistakes, but even the most successful of business-owners can fall into unforeseen financial pitfalls.

Whether it’s issues with clients, mistakes with balancing your books, or struggles with your suppliers, there are a range of potential problematic stumbling blocks to trip up any business.

Here are 5 of the most common financial pitfalls your business may face, and how you can best avoid them.

1. Clients won’t pay their invoices

You’ve established your business and have a growing client base – sounds perfect, right? Well, unfortunately this is not necessarily the case. Even the best of clients can run late on their invoices, which leaves you in the lurch with a diminishing cash flow.

If your business is struggling to get invoices paid on time, it may be worth reaching out for help. Invoice financing can help businesses to improve their cash flow by outsourcing overdue invoices to a third party. The invoice financing company will pay you for a portion of the outstanding invoices - typically around 80%, with the remaining 20% coming on full payment from clients.

They will then either take on the role of following up on your unpaid invoices (invoice factoring) or leave the chasing up to you (invoice discounting) depending on your preferences and the circumstances of your business. So, not only can an invoice financing facility fix the financial pitfall of unpaid invoices, but it can also take on the stressful role of chasing clients for funds.

2. Setting your prices too low

One of the most important financial lessons a business owner can learn is knowing the worth and value of its product or service. However, often when a business starts out it will set prices on the lower end of the market to differentiate itself from the competition.

A few years on, as your business has grown, so too have your operating costs. If you’re not consistently auditing your business margins against both the market and your operating costs, then you may find yourself in a financial pitfall. Increasing your costs over time protects your business from your growing margins and keeps your business profitable.

Ensure that you regularly assess if your prices are up to date and reflect your operating costs. If you’re unsure of your operating costs, simply calculate the costs of goods sold (COGS) plus your operating expenses.

3. Overspending

You don’t always have to spend money to make money, and this is a lesson some business owners have to learn the hard way. Whether you’re struggling with cash flow issues or not, keeping your business lean and healthy is invaluable for its success.

Look for cost-effective solutions in everything your business does. Is there a more affordable way to import materials from suppliers? Do you really need the most high-tech equipment if what you have now still works? Overspending can lead to diminished cash reserves and even force you to take on additional debts to bolster your cash flow 

4. Taking on too much debt

Not every entrepreneur has the luxury of being able to bootstrap their business. If you’ve taken out a business loan or have funded your business with a venture capital company, this is not necessarily a bad thing. Financial issues can start to arise when you take on more debt than you can reasonably service.

Banks earn their profits off of interest and fees on loans, and the higher the debt the more money said bank will make. It’s not uncommon that you will be offered more credit than you actually need because of this.

When you apply for any kind of funding for your business ensure you’re fairly assessing just how much you really need to get your business off the ground, or out of a rough patch. Taking on a significant amount of debt can dramatically hurt your cash flow, and even prevent you from getting further funding due to the size of your liabilities.

5. Relying on one or two clients for revenue

As a rule of thumb, experts believe that it’s never a wise idea to earn most of your revenue from one or two major clients. The reasoning is fairly obvious, as if one of those relationships were to end, your business will suffer immensely.

Look at your client base as you would an investment portfolio – the more diverse it is, the greater an income you may earn and more protected you are from risk and volatility in the market.

When your business is just starting off, it’s not uncommon to build strong relationships with your first clients. However, as time goes on, ensure you’re working hard to grow your client base, as key revenue streams can always dry up.

Without a crystal ball it’s impossible to navigate any business to success without facing some financial pitfalls along the way. However, armed with the right tools and most valuable information, you can keep your business on the right path.

If you think a business finance arrangement with an invoice financing facility could benefit your company, you can apply for a business line of credit with Earlypay. Simply contact our friendly team on 1300 760 205 today or email us at [email protected].

If you'd like to learn how Earlypay's Invoice Finance & Equipment Finance can help you boost your working capital to fund growth or keep on top of day-to-day operations of your business, contact Earlypay's helpful team today on 1300 760 205, visit our sign-up form or contact [email protected].