Seven Critical Business Financing Mistakes
Suppose you commit these business financing mistakes too often. In that case, you will greatly reduce your chances of securing financing for your child care business and lessen your chances for longer-term business success.
Business Financing Mistake – No Monthly Bookkeeping – or, Inaccurate Bookkeeping
Regardless of the size of your child care business, lack of financial bookkeeping or inaccurate record keeping creates all sorts of issues relating to cash flow, planning, and business decision-making.
While everything costs, bookkeeping services are relatively inexpensive compared to most other costs in a child care business. And once a bookkeeping process gets established, the cost usually goes down or becomes more cost-effective as there is no wasted effort in recording all the business activity.
By itself, this one mistake tends to lead to all the others in one way or another and should be avoided at all costs.
Business Financing Mistake – No Projected Cash Flow
Not having meaningful bookkeeping creates a lack of knowing where you’ve been. No projected cash flow creates a lack of knowing where you’re going.
Without keeping score, businesses tend to stray further and further away from their targets and wait for a crisis that forces a change in spending habits.
Even if you have a projected cash flow, it needs to be realistic. A certain level of conservatism needs to be present, or it isn’t very meaningful.
Business Financing Mistake – Inadequate Working Capital
No record-keeping will help you if you don’t have enough working capital to properly operate your child care business.
That’s why it is important to accurately create a cash flow forecast before you even start up, acquire, expand your business, and on an ongoing basis.
Too often, the working capital component is completely ignored. When this happens, the cash flow crunch is usually quickly felt as there are insufficient funds to manage the normal sales cycle and business operations properly.
Business Financing Mistake – Poor Payment Management
Unless you have meaningful working capital, forecasting, and bookkeeping in place, you’re likely to have cash management problems. The result is the need to stretch out and defer payments that have come due. This can be the very edge of the slippery slope.
I mean, if you don’t find out what’s causing the cash flow problem in the first place, stretching out payments may only help you dig a deeper hole.
Government remittances (often payroll taxes), trade payables, and credit card payments are primary targets.
Business Financing Mistakes – Poor Credit Management
There can be severe credit consequences to deferring payments for both short periods and indefinite periods.
First, late payments of credit cards are probably the most common ways for businesses and individuals to destroy their credit.
Second, NSF checks are also recorded through business credit reports and are another form of derogatory mark.
Third, if you put off a payment too long, a creditor could file a judgment against you, further damaging your credit.
Fourth, when you apply for future credit, being behind with government payments can result in an automatic turndown by many lenders.
It gets worse. Each time you apply for credit, credit inquiries are listed on your credit report. This can cause two additional problems. First, multiple inquiries can reduce your overall credit rating or score. Second, lenders tend to be less willing to grant credit to a business that has many inquiries on its credit report.
If you get into situations where you’re short of cash for a finite period, make sure you proactively discuss the situation with your creditors and negotiate repayment arrangements that you can both live with, and that won’t jeopardize your credit.
Business Financial Mistake – No or Low Profitability
For child care startups, the most important thing you can do from a financial point of view is to achieve profitability as fast as possible. Most lenders must see at least one year of profitable financial statements before considering lending funds based on the strength of the business.
Before short-term profitability is demonstrated, business financing is based primarily on personal credit and net worth. For existing businesses, historical results need to show profitability to acquire additional capital.
The measurement of this ability to repay is based on the net income recorded for the business. In many cases, businesses work with their accountants to reduce business tax as much as possible but also destroy or restrict their ability to borrow in the process when the net business income is insufficient to service any additional debt.
Business Financing Mistakes – No Financing Strategy
A proper financing strategy creates 1) the financing required to support the present and future cash flows of the business, 2) the debt repayment schedule that the cash flow can service, and 3) the contingency funding necessary to address unplanned or unique business needs.
This sounds good in principle but does not tend to be well-practiced. Why? Because seeking financing is often unplanned and triggered by an event that requires immediate funds. It seems once everything else is figured out, then a business owner will try to locate financing.
There are many reasons for this. Entrepreneurs are more marketing-oriented; people believe financing is easy to secure when they need it, the short-term impact of putting off financial issues are not as immediate as other things, and so on.
Regardless of the reason, the lack of a workable financing strategy is indeed a mistake. However, a meaningful financing strategy is not likely to exist if one or more of the other six mistakes are present.
This reinforces the point that all mistakes listed are intertwined, and when more than one is made, the effect of the negative result can become compounded.
If any of these business financing mistakes are present in your child care business, you should immediately correct the mistake and implement better financial business practices.