Behind every successful entrepreneur, there is a team of people who offer support in one form or another. Aside from partners and employees, there are key relationships that require your time and attention, no matter how busy and overwhelmed you are. Those are a small business attorney, an industry mentor, at least one leadership mentor (virtual mentors count), a great coach, and a financial advisor/accountant.
It's the financial piece I'm focusing on today. Many small business owners manage their finances alone, which is rarely a good idea. In my experience, some small business owners may be good with numbers but aren't always skilled in the area of analyzing them and spending their money wisely. I don't necessarily mean they squander money, but that they don't invest enough of it into the areas that will help them succeed, like marketing, technology, and customer service.
This is important to note because research shows that 65 percent of the entrepreneurs who cite a business issue (versus a personal issue) as a reason for failure blame financial mismanagement for their collapse. This study, performed by Xero, a provider of cloud-based accounting software, was based on a survey of over 2,000 current and former business owners in the U.S. and U.K. All of these small businesses were staffed by 20 or fewer employees, some had reached the five-year mark; the others had shut down.
Successful entrepreneurs don't make the mistake of mishandling their finances, they manage their money well and keep a close eye on cash flow and other financial reports. Something every entrepreneur should learn to do. Business owners must know where their money comes from and where it ends up going. Yet, when I ask entrepreneurs for a quick breakdown on how much revenue is driven by which product or service, many either don't know or make incorrect assumptions. Some don't even know where their money is spent, including how much they take home from the business. Basically, they take what they can.
Struggling entrepreneurs often make the mistake of spending money in the wrong places. This is often due to poor decision-making that causes a ripple effect in the budget. This fact only reinforces the importance of the relationships mentioned above--an expert's experience and guidance will lead you down the right path and minimize costly mistakes.
What are the right spending choices?
Xero's report indicates that just under half (49 percent) of the entrepreneurs whose businesses hit the five-year mark spend on marketing campaigns and strategic initiatives, including advertising, social media, and PR. This compared to 20 percent of those whose businesses failed. 88 percent of the respondents who closed their doors say their failure to allocate funds to these areas greatly contributed to their company's demise.
In addition to a marketing budget, the business owners who shut their doors regret not taking initiative to improve their customer service. Just one in five invested in improvements to this area but all of them regret this decision and recommend that entrepreneurs do so.
The bottom line.
Your money management skills will make or break your business. Consult with your accountant regularly and ask those more experienced at running a business for help, because you simply don't know what you don't know. You are the only person who can make decisions for your business but it's wise to gather input from other experts before you do.