In today’s dynamic world, starting a business has become effortless. All you need is an excellent online presence, capital funding, and you are good to go. However, when it comes to business profitability, your passion and commitment won’t be enough. Entrepreneurs have to look for every opportunity to push boundaries and learn about their industry. They have to be efficient problem-solvers and risk-takers to lead their business in the correct direction.
Most importantly, entrepreneurs shouldn’t be afraid of failures because that is what helps them grow. Indeed, one can correct mistakes on the fly, but you have to be extra vigilant with financial management. Money-management errors can create discrepancies in internal operations while raising questions on business survival. After all, a dried-up cash flow and accumulated amounts of debt can bring even the most promising company to its knees.
Similarly, entrepreneurs have to stay careful of profit-related mistakes. With every upsurge in profits, they start increasing expenses without acknowledging the cash availability. These practices slowly drown companies into a liquidity crisis, making it challenging to keep the business operational. If you want to avoid such mistakes, polish up your number-crunching skills and apprehend profit-related complexities. Here we are listing five crucial profit mistakes entrepreneurs make and ways to overcome them.
1. Insufficient Working Capital
In simple words, working capital reflects the number of funds a company has to remain in business. Thus, having insufficient working capital indicates financial distress that could be a sign of insolvency. It happens when companies have a lot of cash tied up in their inventory, or their debtors are taking forever to payback. Because of these payment delays, owners can’t pay their suppliers, vendors, or creditors, creating financial constraints.
So, how can you maintain a positive working capital? Firstly, understand the accounting basics. You can take up short courses or complete an online liberal studies degree to learn the ropes. The professional discipline focuses on the accounting curriculum, helping you streamline the company’s profits.
2. Evaluate Profit Margins
Most entrepreneurs don’t understand the concept of ‘margins.’ It is a crucial indicator of profits and demonstrates the impact of expenses on business profits. Thus, every time you look into financials, deduct the direct costs and inventory from revenue. It would calculate gross profit, reflecting your company’s profitability at the cost-level. You can do the same for expenses to analyze the percentage of sales that go into costs.
For instance, if the profit margin is 35%, compare it with the industry average to determine where your company stands. If this margin is low, it would be arduous for businesses to make a net profit. After all, you need sufficient money to cover the overheads, i.e., business expenses. Therefore, calculate margins at the beginning of the financial year. If the margins seem low, adopt cost-cutting methods immediately. It would increase the gross profit, increasing business profits.
3. Incorrect Price Calculations
Do you have price-sensitive customers? With more substitutes available in the digital marketplace, every entrepreneur wants to offer competitive prices. As a result, they keep offering discounts and promotions to captivate more customers. It might increase your revenue, but the deduction in prices will adversely affect profitability. Let’s say you were selling a product for $80. This price must have included the raw material cost $40, business expenses – $30, and profit – $10.
Now, when you offer a discounted price of $70, the deduction of $10 directly happens from profits. No matter how much sales you generate, the profits would still be zero, driving your business out of the competition. Hence, entrepreneurs should cut-back on costs before decreasing prices to ensure minimal or no impact on profits.
4. Incurring Credit Card Debt
In the finance world, we go by the rule ‘never count your eggs before they hatch.’ Precisely, entrepreneurs shouldn’t start spending before income comes into the business. You might have signed a million-dollar deal, but until that turns into receipts, you shouldn’t spend any money. Unfortunately, entrepreneurs don’t play by this rule; instead, they use credit cards to fund additional business expenses.
It compounds expenses and incurring interest rate charges, especially if you don’t pay off the entire balance every month. Hence, the expenses worth $280 cost you $325, depending upon the prevailing interest rates. If the client delays payment, you will have to use business profits to make credit card payments. In addition to disrupting the overall budget, the lack of profits can upset shareholders, slowing investment activities.
5. No Budgeting
Do you prepare budgets? Entrepreneurs think they can remember everything. However, managing utility bills, paying creditors, and sending reminders to debtors single-handedly can be pretty much challenging. It increases the likelihood of mistakes and errors while leaving a bad impression on stakeholders. Before such inefficiencies start impacting business profits, entrepreneurs should prepare budgets. After all, having a monthly and annual budget is essential for effective financial management. It gives you a keen idea of business expenses and income. Likewise, it would ensure you have sufficient cash for keeping the company afloat.
Final Thoughts
In today’s highly competitive era, entrepreneurs have to manage multiple things simultaneously. From recruiting talent, managing marketing practices to overseeing internal operations – business owners have a lot on their plate. In all the chaos, they often make wrong decisions and profit mistakes. Sometimes, there are errors with price calculations, while at times, the incurring debt consumes all profits. Before the business starts falling apart, recognize these mistakes and overcome them.