Companies fail for a lot of reasons, but financial mismanagement is generally at the top of the list. Here are five reasons why firms bite the dust, and how to avoid making a business mistake:
Business Mistake #1
Revenue – or Rather, Quality of Revenue. Many entrepreneurs – if not most – have a sales background, and they do what they do best – sell! There are many great sales tracking processes, incentive schemes, CRM systems and rosy projections. Less often seen are client gross profitability models, incentive packages that reward profitability and collectability, and concern about concentration of clients. When it comes time to value your company – make sure you have revenue quality.
Business Mistake #2
Failure to Measure Gross Profit. Many small companies fail to distinguish between overhead costs and cost of sales. Cost of sales are costs that are needed to make a sale: cost of product, cost of service delivery, payroll for service fulfillment, etc. Overhead costs are costs that would be incurred whether you made zero sales or more sales than you know what to do with: rent, administrative costs, and office costs to name a few. Failing to distinguish between the two properly means you have no idea how you are doing relative to peers, and have no way to control overhead or maximize profitability.
Business Mistake #3
Lack of Costing Data. Many companies fail to develop metrics that can tell them the cost to deliver a product or service per unit. When you pin down your cost of service delivery, you can start to find ways to reduce or transfer costs and improve margins. It can be very enlightening when you find that revenue per unit does not come close to covering costs.
Business Mistake #4
Lack of forecasting. Unless you update your plan continually you cannot know where you are going. You have to forecast cash and revenue growth in order to plan for credit needs. Forecasting is essential if you want to convince buyers that you know what you are doing.
Business Mistake #5
Forgetting the 80/20 rule. This well-known rule says that 80% of the dollars come from 20% of the transactions. Also 80% of your problems likely arise from 20% of clients. Once a month make a habit of reviewing your client list, your product or service list and your customer service issues list. Can you eliminate some of those bottom feeders, or put them on auto-pilot? It will make life easier and help put more focus on the real drivers of your business.
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