Continuing our discussion on the four common mistakes that entrepreneurs make, today we will introduce the third common mistake: spending cash on the wrong things.
Spending Cash on the Wrong Things
People with years of business experience know the value of cash. One experienced small business owner said, “Profit is like food, but cash is like oxygen. You can survive for quite awhile without food, but without oxygen you’re dead almost immediately.” Another entrepreneur stated quite simply, “Cash flow is more important than your mother.” It is a common tendency among entrepreneurs to spend a lot of time looking at the top line (revenues) or the bottom line (profit), when often the downfall of their business is the line on the balance sheet that says “Cash”.
While it’s important for every business, big or small, young or mature, to carefully manage cash, it’s especially important for small or new businesses. There are certain things that are typically a good use of cash. Customer acquisition, putting together the right team, and improving processes & productivity are vital elements of any business that require funding.
But even within those key categories, are you really making the best use of your cash? Are you acquiring the right customers? Contrary to popular belief, not every customer is a good one. Do you have a plan for focusing on the right customers for your business? What are you doing to put together the right team? Are you looking for specific characteristics and abilities, or just a pulse? If you are investing in processes & productivity, are you measuring the results? If not, how do you grade your investment? Are you focused on accountability? Cash spent on improving productivity is wasted if there is no accountability to hold the changes in place.
One other note: Far too many business owners and entrepreneurs treat the business like their own personal checking account. Need a little extra money for that vacation? Take it out of the business. Feel like buying a boat? Take it out of the business. When times are good that might work, but when things go south (as they have for so many business owners over the past 2-3 years), suddenly they wonder why the business struggles to meet payroll and pay vendors. Treat the business like a business, because that’s what it is.
How is your cash flow? Are you spending money on the right things? What is one change that you could make today to better manage your cash?