Avoid the Most Common Financial Mistakes When Growing Your Business

May 14, 2024 | Partner News




By Cultivate Advisors

The key to running a successful business is having a solid understanding of the financials. However, many entrepreneurs struggle with financial management, leading to some costly mistakes along the way.

From poor financial planning to not keeping an eye on cash flow or investing in the wrong areas, there are many ways owners can make mistakes when it comes to the financial management of their business. According to Cultivate’s Strategic Financial Director Tina Moser, your business centers around your financials. Without a solid foundation, you’re going in blind, meaning you could be missing out on huge opportunities.

There are three areas business owners can explore to learn the ins and outs of their business’ financials to make data-driven decisions to grow the business.

1) Get a business appraisal to get your baseline and understand the value of your business

According to studies, many owners vastly overestimate the value of their business. Emotions and a lack of understanding of the market are big factors in overvaluation. The truth is, the worth of your business fluctuates based on a number of factors, including historical financial data, growth potential, industry trends and more. Knowing the true value of your business is important for building an exit strategy, attracting investment, selling your business and planning for future growth. According to Tina, a business appraisal is essential for long-term planning. Knowing the actual value of your business gives you a starting point and a benchmark. In addition, a business appraisal can highlight insufficiencies and unstable cash flow. More importantly, it can provide you with insight into the different levers in your business that you can use to develop strategies to build the value of your business over time.

2) Develop your skill to have a strong understanding of the financial

To manage and grow a sustainable business, you need to not only know your numbers, but you need to understand them. At Cultivate, we work with hundreds of small businesses, and it is in our methodology, financials are at the core of building a healthy business. Building a strong financial foundation starts with tracking and reporting your financials and analyzing your profit margin by looking at each product/service offering, and learning how to use that data to make decisions. Often, owners will hire a bookkeeper or CFO to manage the financial aspects of their business. While that’s a great step, it’s important that you know and understand your numbers to make more informed decisions for your business. If you’re ready to get your financials in order, here are three areas you can skill up.

Financial statements
Small business owners need to know how to read financial statements. These statements highlight your business’s revenues and expenses and resulting profit or loss. At a high level, your financial statements will show whether or not your business is profitable and if your business model is sustainable. Beyond that, they can provide insight into your highest and lowest revenue streams and where your business is spending too much money to help you make better financial decisions.

Every successful business needs a detailed and realistic budget. Your budget sets the framework for your business’s finances, and knowing where your company stands financially is the foundation on which all these other skills rest. Once you’ve mastered it, you need to learn how to use that knowledge to plan for your company’s future, both in terms of short-term planning and long-term forecasting.

As a small business, you must learn the importance of keeping detailed financial records. Budgets are only helpful if you follow them. Whether you have an online program like Xero or Quickbooks or a simple excel sheet, you must track how much money you spend and consistently compare it to the budget. Having a better understanding of your accounting can go a long way to better manage and monitor your business’s health. If you want to take your financial skill to the next level, learn more about our Financial Series or schedule a quick call with someone on our team to learn how you can gain access.

3) Financial forecasting for the future

Once you have a strong understanding of your business’s value as well as the financials of your business, you can look toward financial trends. Often where owners fail is that they will set a goal and only check-in to see if they are on the right track. As your business grows and shifts, it’s important to realign your goals in relation to those changes. Since things change daily, understanding how much money is flowing in and out of your business is crucial. Cash flow management keeps track of this flow and analyzes any changes, which allows you to spot trends and identify opportunities. Trending is about identifying those opportunities and taking action. Your first step in building out your cash flow statements is to start with our Cash Flow Projection Tool. This tool allows you to plug in your revenue and expenses from previous months to project your cash flow into the future. Understanding how to track and project your cash flow will help you make informed decisions based on your past performance to help run a more profitable business.

You don’t need to be a financial expert to have a strong financial foundation for your business. However, making small changes to develop your skill or working with an expert can go a long way to better manage and monitor your business’s health. If you’re a Cultivate client, check out our resources. If you’re not a client, but you’re interested in any of our financial planning tools, schedule a free two-hour session to learn more about Cultivate, and let’s dig into your business and develop a plan.

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