Running a company is incredibly difficult. Whether you’ve been at it for years or have started a new venture, building a reputable, sustainable business takes courage, planning and a willingness to take risks.
Those risks will make or break your business, but a common pitfall is inadvertently ending up in debt. It can creep up on you unawares. Before you know it, you’ll have unpaid invoices piling up, banks breathing down your neck and employees asking what happened to their last pay slip.
Here’s 8 easy mistakes which can get your company into debt.
- Failing to budget
Every business needs a plan, and while you may have what looks like a robust, ambitious business plan of your own, failure to budget properly will land you in hot water. You need to be able to predict every overhead and expense as accurately as possible. If you do that, you’ll know how much you can spend on the exciting stuff like sales and marketing. It will also help you to avoid overspending.
If you have a budget, monitor it and re-assess regularly making any adjustments needed to keep on track
- Failing to save for that rainy day
Cash is king. By ensuring your business has enough reserves in the bank, you’ll be safe in the knowledge that, should something go wrong (and it will, at some stage), you’ll have funds you can call on, rather than the bank manager.
- Not putting aside money for Corporation Tax
If you run a limited company, you need to pay corporation tax on your profits. Build that into your budgeting when you create your yearly budget. Don’t ignore the difference between pre-tax profit and profit after tax, it will almost guarantee ending up in debt.
- Irresponsible use of credit cards
Credit cards are often an essential line of funding for businesses, but, just like our own personal plastic, they can be all too easily misused. Remember – you’ve budgeted for everything, so if you find yourself using a credit card to make a purchase which isn’t planned for – stop.
- Taking your eye off cash flow
I’ll say it again – cash is king. Every business needs a healthy cash flow if it is to ensure suppliers are paid and workers recompensed. A daily eye on the bank account is no bad thing indeed, nor is a cash flow forecast, which can be drawn up separately to your main budget.
- Ignoring debt
This is an easy one. If you find your company slipping into debt, you need to address the problem head on. Sticking your head in the sand and pretending creditors don’t exist will only land you further in debt. Tackle it!
- Focusing on turnover
I’m very fond of one particular business saying: ‘turnover is vanity, profit is sanity but cash is reality’. Big turnover figures may look nice, and they may continue to grow year-on-year, but what about the bottom line? Is your business profitable? If you have overheads which are eating up all of your margins, you’ll likely end up in debt, and it can happen quicker than you think if you focus solely on the big numbers.
- Taking bank loans
There’s nothing wrong with turning to the bank for a loan, but in doing so, you’ll instantly be putting your company in debt. Consider other ways of funding, first, such as invoice discounting, factoring, asset finance or commercial mortgages, which could be more beneficial for your business. Most notably, if you’re willing to co-own your business, seek out an investor. They’ll provide the capital you need and ask for a share of profits in the future, so there’ll be no expensive debt to repay.