Common financial mistakes and how companies can avoid them

If you are an entrepreneur, you will know that financial management is key to the success of your business. For this reason, we recently gave you some guidance by telling you some of the most common terms you should know if you are an entrepreneur. But now we go one step further, as often, excess optimism, lack of experience or ignorance in finance can lead to common mistakes that can put your company's financial health at risk. And, so that you can avoid them, here is a list of some of them.

Common financial mistakes

Having solid financial control and organization is essential for your company to grow and succeed. Errors in this area are not unique to the most novice entrepreneurs; even the most experienced businessperson can make one. But so that you can keep them in mind when bringing your startup to life and can avoid falling into them, we tell you about them here:

• Liquidity deficit. Bringing your business idea to life with insufficient initial capital will only make you overly dependent on external financing sooner or later, increasing the risk of indebtedness. To prevent this from happening, it is important that before launching into the market you evaluate how much capital you will need, and also have an emergency fund, that is, money set aside for possible unforeseen events.
• Not having a budget. Planning a company's expenses is one of the main steps before starting it up. It is essential to create an annual budget that makes it clear how you will distribute your project's expenses and stick to it all the time. When you do so, you should also bear in mind possible needs that may arise in the medium term so that you can meet them if they occur.
• Having very high fixed costs. This is a very big barrier to a company's growth, especially if you do not achieve the income you had planned. To prevent this from happening, optimize your fixed costs from the beginning and constantly evaluate which costs can be reduced without affecting your results.
• Too much debt. Having too much debt puts your project's growth at risk, as all the income you generate will go towards paying off those debts instead of investing it back into your company. It’s important that, when applying for a loan, you make a prior assessment of your ability to pay it back on time, because although access to credit can be very helpful for growing your business, it can also become a huge burden if you cannot ultimately manage to take it on.
• Not investing in your project. When the first income and profits start coming in, you will probably be tempted to keep it for yourself. However, this would be a big mistake. A startup, especially when it has just started, needs investment. Therefore, it’s important that the first income generated is reinvested in your business to continue growing and generating more, ensuring long-term financial success.
• Not keeping track of costs and expenses. Keeping a meticulous control of all the expenses your company has, is crucial to avoid imbalances and deviations in the budget. Your business's accounting will allow you to make decisions based on real data. Therefore, don’t neglect this area of your business, keep an exhaustive record of all your company's financial movements and perform monthly reviews to keep everything under control.
• Unfamiliarity with tax regulations. You cannot start a business without knowing the laws, tax regulations and fiscal obligations, otherwise, you may fall into non-compliance, which has consequences such as fines and penalties. The solution to this is to keep track of your tax obligations; for this, you can have an advisor to help you. In addition, you should have consulted all the regulations to comply with in advance and keep them always updated. Finally, we recommend that you review the available tax benefits and take advantage of them if possible.
• Not diversifying income. Another very common mistake is relying solely on one source of income, which is a threat to financial stability. This makes you vulnerable to market changes and conditions. Therefore, exploring more alternatives and diversifying is key.

Some final advice

After seeing all of the above, you should have a good idea of what to avoid and how to do it. But before we go, we want to leave you with some final tips so you can prevent errors in your financial organization:

• Know the regulations and review them periodically to keep abreast of possible legislative changes.
• Conduct internal audits regularly to detect errors before they become major problems. For this, you can hire external auditors to ensure that this review is truly objective.
• Foster financial education in your company, especially for employees who assume financial roles; this will prevent falling into errors due to lack of knowledge.
• Finally, if finance isn’t your thing and you can't properly take control of this area, we recommend hiring an external advisor to help you keep everything well managed.

Managing your company's finances well is key to achieving success. Avoiding these mistakes and applying good practices will allow you to ensure the sustainable growth of your business.