5 Reasons Why We Make Business Financial Mistakes
After years in strategic financial roles, (primarily CFO roles) I’ve both made and witnessed many financial errors. After some reflection, I’ve observed some common errors that led to those mistakes. Here are the 5 most common financial mistakes that I’ve seen during my career.
Failing to do a thorough financial analysis
When we feel that doing a full financial analysis is too much work we frequently resort to trusting our gut as an excuse to avoid the hassle. Some have described this feeling to me as “the juice wasn’t worth the squeeze”. We sometimes rationalize that every forecast is wrong anyway. However, it isn’t about modeling perfectly, but rather learning from doing the work of reviewing it, presenting it, and reworking it.
One company I worked with was considering a strategic shift and a large multimillion dollar investment. We spent weeks, if not months, analyzing, learning, and re-analyzing. The model we created wasn’t perfect, but the learnings from analyzing continued to refine how we approached and executed the investment, resulting in a significant ROI.
TIP: Reflect on the last large financial decision you made in your business and ask yourself, “did I really analyze it? Could I describe clearly what the expected financial return would be?”
Lacking awareness of the motives behind our decisions
We might also catch ourselves being unaware of our motives behind the decision. Are we making the decision because we’re too tired to do any more? Too busy to focus on the decision? Feeling rushed? Never make big decisions if any of those feelings are prominent.
TIP: find a trusted advisor and ask them to hold you accountable to your motivations behind your decisions. Ask them to regularly challenge you on your motives.
Not taking an informed approach to financial problem solving
Frequently we follow the examples of solving problems set by others, without thinking about its application to us. I’ll use software companies as an example. There is so much written about the right metric for understanding and growing a software business. And while many have broad appeal and are worthy of consideration, too many times I’ve witnessed blind acceptance of recommendations without a real understanding, which may result in an adjustment to the metric that would be far more insightful. As a result, sometimes we end up focused on the wrong or less than optimal things.
TIP: Review the most impactful key metrics in your business and challenge its assumptions. Could it be adjusted somehow to make it MORE impactful?
Not learning from financial mistakes
Confucius once wrote:
“By three methods we may learn wisdom: First, by reflection, which is noblest; Second, by imitation, which is easiest; and third by experience, which is the bitterest.”
Learning by experience and reflection is powerful, and it takes effort and a willingness to humbly look at ourselves. It’s easy for us to learn from others, but it’s more difficult for us to look at ourselves. This is often caused by our being afraid to look at ourselves, being too busy, or not taking the time to hold ourselves and the organization accountable (so that they can learn).
TIP: Review the last mistake you made in a financial decision. Analyze why you made the mistake. Even better, model this behavior by describing it to your team and asking for feedback.
Not investing properly in finance and accounting
With respect to their finance and accounting teams, some businesses put in little effort and get returns. Some even don’t think about it at all. Investing too little will lead to financial and accounting errors, worthless reporting, and an inability to learn from the data in your business. Sufficient investing means clear insights, actionable information, and greater confidence in decision making.
TIP: Consult with a peer CEO that you think might have a strong finance team, whether or not they are full-time financial resources or fractional. Try to identify differences in how they approach their investment in finance and accounting.
If the idea of a full-time CEO or accountant sounds daunting to you, you might want to begin smaller. Consider taking on the help of a part-time bookkeeper or part-time controller. Contact Amplēo to see if we might be a good fit for you in making the right financial decisions that will further your company growth.