The following are the 10 greatest side effects of poor financial management on your business:
- Causes missed business opportunities
- Leads to Inefficiency
- Results in low productivity
- Causes low profitability
- Results in inability to compete
- Piles up high debt profile
- Causes legal issues
- High cost of capital
- Wrong investment
- May result in business shut down
Far too many small businesses fail due to poor financial management.
The topic poor financial management is a topic that cannot be exhautively discussed in an article of this size.
However, this article shows a few of the many ways poor financial management can hurt your small business. Here we go!
Causes missed business opportunities
Poor financial management can lead to loss of business opportunities
For example, if you have locked up a significant portion of your business capital in fixed assets to the detriment of current assets, you will not be able to take advantage of any sudden business opportunities.
A business opportunity could be brought about by changes in government policies and regulations.
The changes might be such that could favor small businesses like yours.
It could also pop up due to major changes in your industry or to other causes.
Consequently, because you do not have cash in hand, you cannot benefit from such opportunity.
And, of course, your competitors who have no cash flow issues will simply grab the opportunity.
Leads to inefficiency
Another side effect of poor financial management is that it could lead to inefficiency in the way you run your business.
For example, if you do not prepare, implement and monitor your cash budget, you could have problems with cash flows.
Consequently, you might not be able to service your loan, pay wages, suppliers and other business bills as they fall.
Furthermore, additional interest charges for defaulting on the loans will further reduce your profits.
Therefore, continual defaults on your legit obligations can put question marks on your reputation.
Results in low productivity
Yet another side effect of poor financial management is low productivity.
For example, if due to poor financial management , you are experiencing regular stock outs of essential raw materials, you will not be able to meet customers’ delivery deadlines.
Furthermore, if this situation continues unchecked you might face the risk of keeping idle machines.
Plus, you will have to pay employees for idle time.
But if you have efficient financial management this avoidable situation will not arise.
Remember that high labor turnover comes at price.
You will need to pay severance and similar entitlements to disengaged employees.
Beyond that, some disengaged employees may spread negative news about your small business.
Furthermore, it might be difficult for you to find good employees to replace those who are leaving.
Results in low profitability
Low profitability is yet another side effects of poor financial management.
For example, you can not expect employees you are owing months of unpaid salaries to generate sales and profits for your small business.
In addition, when employees are not working at optimal production, you will still need to pay for overhead charges for work not done.
Furthermore, if your business continues to operate in this manner, your business will begin to report losses.
Consequently, shareholders from your company and take their funds to other profitable companies.
Results in inability to compete
Inability to compete in the marketplace is another side effects of poor financial management.
For you to be able to compete in the marketplace, you will need to create a marketing plan.
But if you have the problem of poor financial management, you might be tempted to divert the funds budgeted for adverts to other uses.
Therefore, if you do not stick to your marketing plan and budget, you will not be able to drive sales.
Piles up high debt profile
Poor financial management can land you into high debt profiles.
For instance, if due to poor financial management, you are unable to pay your business bills as they fall due, it will affect your reputation and credit rating.
Consequently, it will be difficult for you to access loans from lenders.
Causes legal issues
Poor cash management can land you in court.
For example, if you take a loan from bank and are unable to service the loan, the bank can take legal actions against you to recover their money from you.
Worst still, if the case turns out to be unfavorable to you, the bank can sell your property to recover their money.
Poor financial management can force your business to shut down.
In a situation where your business has no cash in bank and at bank, stocks, debts collectible your business will of course shut down.
Worst still, the bank and other creditors can come at the same time calling for their money.
High cost of capital (interest)
Some times, you might need to borrow funds from lenders to upgrade your business.
If you have poor financial management skills, you might be able to negotiate fair rates for your business.
If the cost of capital is high, it will reduce your profits.
Therefore, good financial management requires that you should be able to negotiate fair interest rates.
Can lead to wrong investments
Poor financial management can make you place your money in an investment that may not yield you high returns.
For example, you can just buy shares in a company that has not paid dividends for years due to poor profitability.
Poor financial management can even make you to invest in a company that is financially unstable.
In conclusion, in order to make your business successful, you will need to develop policies and procedures that will check poor financial management.
The frustration that comes with business failure due to poor financial management is not something you will want to experience.
Leads to business shutdown
Poor financial management can make your business to shutdown.
For example, if your business continues to report operating losses year in year out, your business will shut down before you know it.
The frustration associated with business failure is better imagined than experienced.
Therefore, you should take steps to put in place effective and efficient financial system that should safeguards your investments.
By Samuel Ijenhi