Financial Literacy - Careers
5 ways to crash your small business

Underestimate cash needs

Business probably won't be booming right off the bat. Just like in personal finance, keeping enough cash on hand will save your business during the rough times.

"That is the one thing I always warn people about the most," says Fred Glave, a Washington, D.C.-based counselor with SCORE, which offers free consulting services.

"They underestimate the amount of cash they'll need, so they don't capitalize themselves adequately when they start," he says. "So they run out of money and then they're desperate."

A related factor that contributes to underfunding is overconfidence about the amount of time necessary to build sales or clients.

"At the beginning, you're having so much fun that you forget that you have to have dollars in the door to make a payroll, for instance. You're having fun, but at the end of the month, you don't have enough money," says PBS' Hattie Bryant, creator and host of "Small Business School."

"For example, a big mistake that people make is thinking that they are going to make a sale really fast when in reality, it can take six months to close a sale," she says.

Although experts recommend having at least six months' worth of cash on hand, they also say business owners should assume they will not make a penny for a year. That may seem like a long time, but without enough cash to survive the ramp-up period, your small business may never overcome its first challenge.

"It could be a really great business for that community, but if they haven't financed themselves enough in order to capture that market or if they have under-forecasted how long it will take to gain customers, they may run out of money before it's had time to fully develop," says Wendy Vinson, president of E-Myth Worldwide, a global business-coaching company based in California.

For instance, everyone has probably seen a great business move into the neighborhood and then close before the end of the first year. On its heels, a similar business moves in and makes a go of it.

So what is the difference? "It could be that they have a better value proposition. They may have spent more money figuring out how to attract their target market, or they just have more money to allow their natural ramp-up time to occur," Vinson says.


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