7 Financial Mistakes of 7-Figure Companies
As a seven-figure company, you’ve been around the block and know what things deserve your attention and which don’t. However, even successful businesses can fall victim to common financial pitfalls. Here are the seven frequent financial mistakes made by seven-figure companies and how to avoid them.
Mistake #1: Neglecting Financial Forecasting
Many companies that get to the first million in revenue start instinctively focusing on growth, which often means overlooking the importance of financial forecasting. Without a clear roadmap, businesses can easily get off-track and spend more than needed, effectively reducing their chances of survival.
Solution: Implement financial models. These models should project future revenue, expenses, and cash flow. By analyzing these projections, you can identify potential risks and opportunities early on, which also helps you stay on track.
Mistake #2: Ignoring Cash Flow Management
Even profitable businesses can be cash flow negative (remember?), particularly during periods of rapid growth or economic uncertainty. There is a psychological effect from getting to the first million: it can give owners the ‘license’ to spend more. Do not let this be you.
Solution: Prioritize cash flow management. Cash is king! Monitor your accounts receivable and payable closely. Implement strategies to accelerate cash inflows, such as offering prompt payment discounts or using factoring services. Additionally, consider optimizing your inventory to minimize overstock and holding costs.
Mistake #3: Not Investing in an Enterprise Resource Planning (ERP) System
An ERP makes the difference between being on top of things and being in the digital stone-age. Software as accessible as QuickBooks can do the trick. You will have multiple options to choose from, look for the one that works best for your business, but don’t go without one.
Solution: Embrace the decision: you need an ERP. Invest in accounting and budgeting software so that you can organize your financials better, get real-time insights, and ensure data integrity.
Mistake #4: Overreliance on Manual Processes
Manual processes can be time-consuming, prone to errors, and inefficient. Because of the nature of some of these processes, finance teams need to execute them. This can be time-consuming and -sometimes- demoralizing because of its repetitive nature. Use financial automation tools to streamline processes and run repetitive tasks in the background.
Solution: Automate wherever possible. Implement automated workflows for tasks like invoicing, expense reporting, and payroll. This will not only save time, but it will also improve accuracy and improve the team’s morale as they will focus on more engaging work.
Mistake #5: Lack of Financial Controls
We’ve said it before: finance is like the brakes of a car. Having good brakes makes the driver confident they can go at top speed. In Finance, the brakes are control systems that allow operators to stop, pause, or proceed with a purchase. A robust system of internal controls is crucial to safeguarding assets and ensuring financial discipline.
Solution: Establish robust financial controls. Implement segregation of duties as much as possible, regular reviews of financial records, and regular audits. Consider hiring a qualified CFO (or Fractional CFO) to oversee your financial operations.
Mistake #6: Inadequate Risk Management
Remember this: Risk equals possibility of loss. That loss can come in many forms, but the most usual one is money. Failing to identify and mitigate financial risks can lead to significant losses. Not having a risk management framework is like having no insurance and hoping we will never get sick.
Solution: Develop a comprehensive risk management plan. Identify potential risks, such as market fluctuations, credit risk, and operational risks. Implement strategies to mitigate these risks, such as insurance, diversification, and contingency planning.
Mistake #7: Poor Financial Reporting
You can’t improve what you can’t measure. Reporting is an excellent tool to identify how close your results are tracking with your goals. Furthermore, even with financial reports in place, inaccurate or untimely financial reports can hinder decision-making and compliance efforts.
Solution: Improve financial reporting. Ensure that financial reports are accurate, timely, and compliant with relevant accounting standards. Consider using data visualization tools to make financial information more accessible and understandable. Tip: pair this solution with the solution of Mistake #4 to overhaul the process.
Conclusion
By avoiding these common financial pitfalls, seven-figure companies can not only maintain their success but also stabilize their growth at different stages of their journey. It’s easy to forget, but high revenue doesn’t mean success. Financial health is the key indicator of a successful business. By implementing robust financial controls, leveraging on technology, and fostering a culture of financial discipline, you can secure your company's continuity and unlock its full potential.
