1. Don’t pay attention to competitors
It is important to analyze the performance of competitors in order to understand industry trends as well as to see new ways to improve your own performance. Without observing other companies, it is easy to focus only on “your truth” and stay behind both financially and in growing your customer base.
2. Try to finance everything yourself – do not seek financing from banks or other credit institutions
While over-indebtedness increases the risk of insolvency, complete avoidance of loans can also lead to bankruptcy. How? For example, if the development of a company must be financed from its own resources – the higher the turnover, the higher the investment required in working capital. It is possible that at a time of rapid growth, the company will lack the money to implement projects on time and receive payments from customers. In addition, too little money in the company means that large investments are not possible and the business can grow only moderately. The recommended ratio of credit liabilities to assets is 0.3 – 0.6 – however, this ratio is different in each sector.
3. Do not try to agree with partners, suppliers and customers on more favorable conditions
For an AG Capital customer in the construction sector sales had increased 3 times over the year, but a CFO was not hired. Both suppliers and creditors had to pay before the company had managed to sell the products and services. With higher production volumes, the need for materials and an additional workforce also increased. In the construction sector, payment periods are long, but in this case, they increased even more due to the increase in turnover and poor planning of funds. The company had difficulty paying employees’ salaries despite rapid growth. AG Capital recommended 3 things to the company:
- turn for help to a bank and receive a credit line/factoring in order to be able to cover the primary working capital;
- agree with suppliers on later payments and contact customers requesting faster payments;
- change the terms of working capital in the long run, including payments, advance days, interest payments, and guarantees, so that as much money as possible remains in the company’s account for a longer period of time.
4. Hire too many/unproductive people without creating a remuneration system
Wage costs can be one of the biggest cost items in a company’s PnL, especially if the company provides services. Every business should regularly review, for example, the work of individual departments in the company. Often companies underpay the most productive employees and overpay the most unproductive ones. It is also important to set up a remuneration system and apply the best conditions for each employee – a fixed salary, pay based on hours or projects, and bonuses.
5. Don’t develop a budget (financial plan)
A detailed financial plan helps companies understand cash flow, the efficiency of internal resources, costs, and keep track of goals. Without budgeting, it is difficult to understand the impact of spending on the business. However, if the company’s turnover does not exceed USD 500,000 per year, in some cases (depending on the industry) a detailed analysis is not necessary, and just investigating ledgers is enough. For larger companies, having a profit and loss account and a balance sheet is usually not enough to successfully understand and manage the company’s finances.