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Ambitious people generally give most of their attention to how they are going to make money. This is all well and good, but holding on to it is just as much of an art as getting it in the first place! Ask anyone who has achieved wealth: There are all kinds of people and forces of nature that want to take it from you, by fair means or foul…
This article deals with deadly money management mistakes that could wreak havoc in your financial world; and discusses how you can avoid making them. These tips apply to all – both individuals seeking to protect their assets and entrepreneurs seeking to build on solid foundations.
Here are 10 of the most costly errors to avoid:
1. Not Developing A Solid Financial Plan
Do you have an actual financial target, a cashflow forecast, a long term plan and a roadmap for how you are going to get there? A clear financial plan is imperative for a well-designed and strategic financial future. Knowing how much you have coming in, how much you have going out, trends in the economy and whether you are on target will enable you to maximize profits and get the best return on your investments.
2. Commingling Personal And Business Funds
According to the U.S. Small Business Administration, poor money management is the main cause of the failure of 85% of entrepreneurs within the first five years of business. It’s also well known that the majority of individuals do not follow best money management practices.
Intermingling your business and personal finances can be a costly mistake. It is not advisable to purchase business items with personal funds and personal needs with business funds. The resulting “numerical fog” will not only prevent you from understanding the true financial health of your business but puts you at risk of major problems in a tax audit.
3. Lawsuits And Other Legal Problems
Everyone, especially those in small business, should take precautionary measures against getting sued – which can be one of the most devastating financial losses. This topic is an essay in its own right but here are a few quick summary points:
a) Get legal advice and make sure that what you are doing rests on solid legal foundations. It might seem expensive but compared to the potential downside it’s a good investment!
b) Avoid conflict. Sometimes people’s insistence on ‘being right’ and their emotional reactions to situations lead to bigger problems than they are worth. It is always better to be strategic and focus on making problems go away. If it means apologizing for something that you do not even think is your fault, it might be better to take the humble approach.
c) Don’t sue. Lawsuits often lead to being sued back, especially if the other party feels wronged.
d) Keep your agreements, play fair and maintain honorable practice.
e) Be cool. If you are the kind of person who is amicable and makes friends rather than enemies, you are far less likely to provoke negative action.
f) Take out a comprehensive general liability (CGL) insurance policy – this won’t prevent suit but can cover legal costs if it happens.
g) Make formal agreements so that everyone knows what is expected of them and what they are expecting of you.
h) Watch what you say. How many times we would have avoided problems if only we would just “zip it”! Also be very careful what you put in writing – don’t send angry emails etc but wait until you have calmed down.
i) Keep an eye on what information about you is available to the public. What’s on the internet can be seen by all and any of this could potentially be used to build a case about you. There are various methods of damage control available but the first and simplest is not to post anything yourself that might land you in trouble!
4. Not Keeping Supportive Documents
Another absolutely avoidable mistake committed by both startups and individuals is failing to keep detailed records and receipts. Keep everything. There are numerous reasons for this – from simple proof of purchase through to tax records. Your business cannot manage expenses accurately if you do not know how every dollar is being spent or you have no documents on where every dollar of income is coming from. Keep detailed, organized records of all business transactions.
5. Failing to Analyze Cash Flow
Poor cash-flow management is another reason why many startups and small businesses fail. You may have customers and what appears to be a thriving business but if you cannot meet your bills due to a failure to manage cashflow, you are sunk. Effective control of the inflow and outflow of cash relies on the ability of entrepreneurs to analyze and manage their cash flow which can be done daily, weekly, or monthly. As an entrepreneur, an understanding of key accounting terms is a must even if you decide to use the services of a professional accountant. Turnover, gross and net profit, and cash flow are the basic financial terms that you need to be aware of as well as why your business needs them.
6. Utilizing Too Much Debt
Prudence with debt is important for all. It is easy to be tempted into debt which might be “cheaper” than investor capital. However, loans require periodic payments even if the business fails, so managing debt is an important aspect of sustaining your cash flow. You can seek professional help from a financial advisor or an accountant for additional advice about managing debt. It seems to be the way of the world now to spend money you do not have. The temptation to “have it now, pay for it later” leads to the perception that you can afford more than you actually can. It’s not free money, but it feels as though it is. However as anyone who has experienced credit card debt knows, you end up paying FAR more than you would have paid and so your long term wealth suffers. You have to think about where you will be in 10 or 20 years time because as much as we don’t like to admit it, that day WILL come.
7. Not Protecting Your Files And Data
From not making ANY backups of your hard drives through to not having a fire extinguisher in the building, many people risk enormous loss by not taking adequate precautions.
You must be prepared for forces of nature, technological breakdowns, protection against theft and other curveballs that could come your way. A few questions to get you thinking:
a) If your building was destroyed by flood or fire, would you lose all your data and paper records, plunging your finances into the ‘dark ages’?
b) When was the last computer backup performed?
c) If someone broke in and stole your computers, do you have an off-site data backup so that you can re-access your files and continue where you left off?
d) What precautions have you taken against hackers?
e) Are your websites protected against cyberattack or intrusion? (It DOES happen!)
f) Do you have a fireproof, high security safe / filing cabinet? (One of the most important things anyone can own!)
8. Not Having Business Insurance
Having the right kind of insurance coverage, and having an adequate amount of insurance coverage is not only prudent from the point of view of asset protection, but is in many cases required by law.
9. Not Having Enough Cash Reserves
The setup of any business requires adequate operating cash. Investing in any business requires fresh capital, so do not fool yourself into wishful thinking the money will somehow be there. Steady income and profit will eventually come in after several fiscal quarters.
10. Violations Of Copyright, Patent Or Trademark
Never attempt to capitalize on someone else’s intellectual property. Not only should you avoid using known names, slogans, logos, products or other intellectual property but you should check to make sure that you are not doing so inadvertently. Always run a trademark search, domain name search and even a basic Google search to check for other entities that may be using the same name and of course, as always, get legal advice.
11. Further Study
This is one subject concerning which it pays to do additional research. Here are some books that have served us well (Amazon links):
Note – this article (as with the rest of this blog) is to be considered as general research and not to be viewed as legal or business advice. Full disclaimer at foot of page. If in doubt, always seek legal counsel.