The main causes of financial failures

1. Cash Flow Gap

The first trouble that can happen to an entrepreneur is to face a cash-flow gap. It is a temporary lack of funds to cover all the company's necessary expenses. It can happen, for example, when the funds arrive later than were expected by the budget plan. But the payments ought to be paid on time. In short, the cash gap comes at the beginning, or the end of the month and asks, "WHERE THE MONEY ARE?".

Why does this happen?

You may don't plan your weekly budgets, didn't make payments calendar, didn't know how much will you spend and how much earn in the next few days and weeks. In other words, inefficiencies of cash flow planning are most often leads to cash flow gaps.

You're probably guessing how to avoid getting into such trouble. It will be enough to make a detailed weekly and monthly payment calendar with a plan of expected income and necessary expenses. Also, the periodic comparison of the scheduled calendar with the actual calendar will save your funds. You need to make the next scheduled calendars as close as possible to reality by the base on the results of the comparisons.

2. Unrealistic Prognosis

An unrealistic prognosis is problem number two. It is such a huge miss, for all entrepreneurs when an entrepreneur starts to daydreaming. They think that their idea is excellent, and it is possible to earn millions by turning it to reality. Entrepreneurs putt a mega-high price on the product or produce numerous of goods before the start of sales. Well, they think there is nothing better on the market.

As a result, such entrepreneurs make plans that in the future, prove to be unrealistic. Such programs are as simple as possible and don't consider the seasonality of business or macro indicators. Such an illusion of personal excellence can form when, for example, an entrepreneur has the power to sell a lot. But one needs to look realistically on things (by the way, that is why all financiers are quite conservative).

This problem can solve by creating several different scenarios:

  • pessimistic
  • optimistic
  • medium

Don't be afraid of the pessimistic scenario. It should exist to keep you within a realistic frame and understand which worst-case scenario you may face and be prepared.

3. Unprofitable price

An unprofitable price is a problem when you start a new product. You don't know and don't understand how much it will cost you, yet. You set the price accordingly to the existing analogs on the market. Then over time, you realize that you sold a lot of products, but for some reason, you don't have profit from it. Such consequences have to establish an inadequate price. You can work hard, but as a result, an unprofitable price won't allow a business to exist. As a result, it will lead you to become a loss-making company.

4. Ineffective solution

The ineffective solution is a typical story for all entrepreneurs. For example, let's look at the network of coffee houses that the entrepreneur wanted to start. He had the idea to create great coffees for gourmets and open coffee houses at several points. Let's imagine - three locations.

One day he found a perfect spot that is open for rent. That place was at a reasonable price but had to be occupied at once. Although the budget was planned for opening just three points, for now. The entrepreneur has made an impulsive decision. He rent the 4th place and causes a bunch of additional costs for himself. As a result, he delayed the launch of his entire business. The sales wheel didn't start to function correctly, and the business struggles even before the start.

Such compulsive decisions arise when there is no financial reporting in the company. You don't understand how much you spend and how much you really can afford to spend as a company and a business. The main thought of this story is to make financial statements and the ability to analyze them quickly.

Every day, entrepreneurs have to take hundreds of important decisions for the business, and they need to do so in less than no time. The lack of convenient and up-to-date management reporting tie entrepreneur hands.

5. False profit

5. The story of a false profit begins when you seem to have a benefit while it turns out that it isn't a profit at all. How is it possible? The reason for this is that entrepreneurs can't calculate their profits right. They think that if they paid all the necessary expenses for production, then all that remains on the accounts is a profit. But this is not that simple.

All that remains in your accounts is all the money you have. And the profit is what you actually earned from the business. To avoid confusion is advisable to maintain income statement and profit & loss report as well as to calculate the profit, not the number on the accounts.

We hope the information was useful for you, and you won't allow such failures in your business. Also, don't forget to check out related articles: