The Top Three Mistakes Mid-Sized Business Owners Make

Running a mid-sized business requires attention to many different facets, with some being more important than other ones.  “Within the course of our business, we conduct business valuations for approximately 150 to 250 companies each year across a wide spectrum of the economy,” says Achim Neumann, President, A Neumann & associates, LLC, a New Jersey based M&A advisor and business brokerage firm, “however, certain themes for why businesses are not performing have stood out in recent years.”

This article describes the top three of such issues.

1. Co-mingling of business funds with personal funds. Unfortunately, co-mingling of funds can take many different forms, from paying personal expenses straight out of the business accounts to expense reports filed and then booked under the incorrect accounts. Needless to say, that efficient financial management is not only impossible under such a scenario, but a slew of other issues, such as improper tax filings, will arise. Clearly, a separation of business accounts from personal accounts is needed. And whereas many small business owners derive many additional benefits from the business beyond the obvious paycheck, such additional financial benefits should be clearly identifiable (to the business owner) on the monthly Profit &
Loss Statements as well as for business valuation purposes if a sale is contemplated.

2. Improper investment focus and time management.  Many business owners, in particular, owners of small businesses, have to fulfill many different roles/tasks. Decisions have to be constantly made for which activities to allocate time and money. And whereas a specific ROI for each activity is not always predictable, more importance should be allocated to cash flow generating activities. “All too often we see add-backs during the valuation process for one-time investments that do not make any sense from an outsider’s points of view”.  The 80/20 rule is a good guidance: 20% of the business activities will generate 80% of the cash flow. A business should attempt to identify this 20% for cash flow.

3. Inadequate cash management. With efficient cash management being important for any business, it’s particularly important for small to mid-sized businesses, as such companies quite often do not have easy access to debt or equity financing. Thus, cash management includes primarily the focus on collecting A/R in as short a time period as possible, extend A/P payments to as long as possible, and developing a sufficient emergency fund in order to bridge unforeseen circumstances.

“All too often we are approached by companies searching for emergency funding, mostly debt’” says Neumann, “only to find out that no proper cash emergency funds were set aside during profitable periods.” As a side bar, such emergency funds might not only be needed during down times, but could also be drawn on when a large (profitable) order is received that requires pre-payment of a vendor to fulfill an order – a prerequisite to materialize a large profit later on.

In sum, if a business owner can avoid the mistakes as described above, then the business has a considerable better chance of surviving – even in bad times.