Not Facing Financials Can Be a Fatal Mistake for Entrepreneurs

Most business owners know what it feels like to weather tough financial times. Whether it’s enduring the scarcity of the startup days or a change in market conditions that leads to a reversal of fortune for an established business, it’s common for entrepreneurs to sometimes face financial hardships. Even a successful company experiencing rapid growth can end up strapped for cash when payables start outpacing receivables and revenue can’t meet expenses.

Given that it’s not rare for entrepreneurs to encounter this type of turbulence, then why is it also so common for them to ignore these troubles and refuse to face financial facts??

I’ve spent years advising numerous business owners on how to improve their financial pictures and had the opportunity to meet many talented and shrewd entrepreneurs along the way. I’ve watched them creatively and brilliantly carve out niches to serve their customers.?

But even those abilities aren’t enough to allow them to survive. Entrepreneurs must have confidence in themselves, their abilities, and their businesses to thrive in a cutthroat marketplace. If they didn’t have this boldness – and at times, bravado – they wouldn’t have the guts to strike out on their own. Instead, they could simply take a more secure and less stressful path and apply their energy towards working for someone else.?

Despite this brilliance and resilience, I have repeatedly witnessed a persistent avoidance of dealing with money matters, an unwillingness to face reality that has the potential to sink the entire ship.?

Face Your Fears

I had firsthand experience with this phenomenon when I was running my previous company. Our management team was so convinced that revenue growth was just around the corner that we continued with the same spending habits even after the 2008 economic crisis demolished one third of our business. Our emotions and self-worth were so tied up in the success of the company that it blinded us to reality.?

After three years of fighting upstream, we finally had to file for bankruptcy to alleviate the mounting stress. The bankruptcy process allowed us to reorganize and come out with a stronger company, but ultimately it was not strong enough to survive the second market shift. Reflecting on that situation, I realize now that our story might have turned out differently if we had deployed bolder decision making in the early wake of the 2008 crisis.

The same drive that motivates entrepreneurs to get their ventures off the ground can sometimes work against them when it comes to admitting to themselves when their company’s financial picture is grim. It might be tempting to ignore financial problems when they arise because it can sap that crucial confidence. It can leave an entrepreneur feeling scared, overwhelmed, demoralized and defeated.?

It’s true that people tend to have a complicated relationship with money, whether they are entrepreneurs or not. That complexity is multiplied when it concerns a company owner who is responsible not just for their own financial obligations, but also has employees, partners, investors, and vendors depending on them to come through.?

That amplifies the weight of the economic burden. Financial difficulties can affect mental and physical well-being and erode quality of life by triggering feelings of anxiety and panic, as well as shame, fear and anger. Incessant calls from creditors can cause the debtor to feel beaten down. All these factors can stoke tension and spark arguments with people around the entrepreneur.?

Don’t Ignore the Signs

Add to this emotional distress the pressing issues that business owners face daily, such as staffing, product development, supply chain management, and other operational challenges. Amid these myriad distractions, it might seem as though scrupulous financial management can wait for another day. Then the days start adding up to weeks and months without these problems being adequately addressed. A problem that could have been surmounted with some instrumental measures early on can take on catastrophic consequences as it grows, unaddressed.

It doesn’t have to be that way. Facing and conquering financial challenges can be empowering once the anxiety fades away. And it’s preferable than the other available choices. For example, you can ignore financial problems and continue getting deeper and deeper into trouble. You can close yourself up in your home and try to ignore reality and pretend it’s not happening. Or you can leave it all behind and escape to a foreign land, cutting all ties with your old life – which is obviously not a realistic option for most people.?

In almost all cases, the most logical route is to face the music and deal with your financial troubles head-on. Make a plan and build a strategy to get back on track.

I’ve often written about how to work your way out of financial trouble, so I’ll put that topic aside for another day. Instead, let’s review how to avoid getting into this quagmire in the first place.?

The Money Trail

Above all, cash flow is king. It is the lifeblood of your business, so keep a close eye on your margins. A classic mistake entrepreneurs make is not charging enough for their products and services. Even impressive growth can cause a cash flow crisis if you don’t have enough financing to bridge the gap between receivables and payables to meet operating expenses and continue covering payroll, rent or mortgages, utilities, inventory, and raw materials. Without proper cash flow, a business simply won’t survive.

A crucial way to prepare for unforeseen expenses is to build up a cash reserve. This is the most important piece of advice I give to businesses. Save a minimum of three months’ cash in the bank as a cushion to draw on if you need it. Companies that had cash reserves when the pandemic hit did significantly better than those who did not have cash reserves. Time and again, I hear from entrepreneurs that the cash reserve I strongly encouraged them to build saved them in a crisis. Or it gave them the backup they needed to make decisions that grew the business, moves that might have seemed extraordinarily risky without that safety net.?

Examine Expenses

An important part of your routine should be to keep a budget and update it regularly with current data. Keep careful track of all expenses. Drawing up budgets isn’t as glamorous as landing big sales and promoting your products and services to new markets, but it is crucial to stick with it. Meticulously going over expenses item by item will also allow you to identify where you are overspending on things that don’t pay off, such as marketing costs that don’t end up bringing in more revenue.

If the expenses do start piling up beyond what your revenue stream can handle, you might find your business is taking on more debt than it can reasonably handle. It’s a good idea to arrange access to capital before you need it desperately – banks prefer loaning money to people and companies that don’t really need it. Having this financing in place can help you bridge temporary gaps in cash flow and enable you to purchase raw materials or goods for resale. This capital can take the form of venture funding, private equity, loans (either straight bank loans or SBA-backed loans), and business lines of credit, the latter having the advantage of being flexible. Friends, family, and personal savings are often relied upon by small businesses, although this is less than ideal as the business grows.?

Be Sure to Insure

Prepare for unforeseen disaster by ensuring your insurance policies are up to date; one bad incident could put you out of business. Even if your budget is tight, it is critical that you find the funds to carry the insurance you need to protect your company.?

The macroeconomic environment can’t be controlled, but you can control how prepared your business is to survive the downturns. And if you are well prepared, you can take advantage of opportunities that arise during periods of economic expansion, rather than clinging to life because you didn’t have enough resources on hand to ride the waves.