3 Causes of Entrepreneur Financial Problems
Entrepreneur financial problems are one of the biggest challenges they face. Usually it’s because they don’t have enough financial resources to accomplish their business goal. This is because a business cannot exist without financial resources, but many businesses don’t have enough to accomplish their growth objectives.
There are several reasons for entrepreneur financial problems, but more often than not I find it arises from one or more of the following things 3.
- No budget
- Focused on the wrong financial objective for their stage of growth
- Don’t know when capital is needed to add capacity
No Budget Causes Entrepreneur Financial Problems
The biggest reason for entrepreneur financial problems is they don’t have a budget. Usually it’s because they don’t understand what a budget is! A budget is a plan. It is HOW you plan to spend money in your business. If you haven’t thought it through before-hand how will you know if you should spend money or not as you go?
As a result most small business don’t have money when they need it to achieve their goal. At the beginning people/ vendors will tell them you need this or you need that. How do they know what YOU need?!!! That’s what a budget is for.
Start a task list of things you must accomplish as you move toward your business goal. These can be general in nature in the beginning and become more specific as you get ready to accomplish them. This becomes your business plan. Now, using this list of tasks estimate what you may have to BUY to complete it. Keep a spreadsheet of these costs and viola you have the beginning of a budget. You can find more about this process in our High Impact Business Planning program.
Focused on the Wrong Financial Objectives
If you have read my post The Search for Growth Continues you know that finance is a major factor in the growth model. Often entrepreneurs are focused on the wrong thing for their stage of growth. For example, they’re trying to get capital for new equipment when they haven’t even proven their business is capable of consistently achieving break even.
Look at the improper focus here. New equipment is usually associated with expanding capacity. Why would you need more capacity if you are not even using the capacity you have to break even yet? This tells me you have another issue either you don’t understand your capacity OR your pricing is way off to begin with. If that is the case then fix these problems FIRST. If you add capacity in this scenario it won’t fix the other problems and you’ll end up with more debt and capacity to sell anyway. So, be sure you are focused on the right objective for your stage of growth so you don’t create more entrepreneur financial problems (see the table later in this post).
Don’t Know When Capital Is Needed To Add Capacity
This is tied to the last entrepreneur financial problem. If your revenue engine is tuned properly you should know when you will have to add more marketing, sales, or production capacity. See our Tuning Your Revenue Engine for more on how to do this.
If you know at what point you’ll need to add more sales people and how much it will cost you can begin saving money for this purpose. This is another item to add to your budget. Not knowing this puts you in scramble mode when the time comes. When you get to this point there are 1,000 other things going on and if you haven’t properly prepared for this milestone you have stop everything else in order to take care of the financial problem you created. Take a lesson from the Boy Scouts and “Be Prepared!”
DO the entrepreneur financial problems that you face with your small business growth fall into one of these 3 categories? If so, how do you plan to tackle them to get yourself on the right track financially?
If your entrepreneur financial problems don’t fall into one of these 3 areas, how would you classify it? These are the one that I typically see, but they are by far not all of them. Share your entrepreneur financial problems here and let’s get a dialogue started so you can focus on growing your business faster.
Growth Stage Financial Objectives & Sources
|Financial Objective||Financial focus is to consistently reach breakeven.||Formal planning is cash forecastingcash takes the pressure offCredit is still difficult to come by.||Cash flow mgmt & profitability key concerns to finance growth or retirement.To grow use retained earnings & cash flow, leverage to finance||Adequate financingEstablish expense & budget controls for strong cash flow.Profitability planning systems||Consolidate & control financial gains from rapid growth.|
|Financial Sources|| owner, friends, familysupplierscustomers
| owner, friends, familysupplierscustomers
| Joint venturesBanksLicensing
|Strong financial resourcesCost systems|