Blog
6 Mistakes Small Business Owners Make In Financial Planning
Many small business owners went into business seeking freedom, a better lifestyle or because they wanted to run their own show but don’t understand how to do financial planning. As such, it is only to be expected that small business owners make financial mistakes that can prevent them from enjoying the sustainable and scalable growth essential to becoming their own boss.
Many small business owners went into business seeking freedom, a better lifestyle or because they wanted to run their own show but don’t understand how to do financial planning. As such, it is only to be expected that small business owners make financial mistakes that can prevent them from enjoying the sustainable and scalable growth essential to becoming their own boss.
Many start-ups fail during the first few years of operation because the cash flow suddenly dries up, there are huge unexpected expenses to cover or a large amount of debt starts to rapidly accumulate.
Here are six of the most common mistakes that small business owners make in finance:
1) Not Separating Business And Personal Finances
Mixing business and personal finances is one of the biggest mistakes in small businesses. As a small business owner, it is tempting to make personal purchases using your business finances or vice versa. However, if you are like any other entrepreneur it’s going to take multiple attempts at operating a business to be successful. That being said, you should make sure that your business does not ruin your financial reputation for the future.
This could also make your account keeping more complicated especially when it’s tax time, where your precious time and money will be wasted on going through all of your bank statements and receipts to separate the two expenses. You would also have no way of applying for a business loan because it would be difficult to show your bank account history.
Open up an entirely separate financial account and apply for a business credit card, so that you are able to see how your business is actually doing. If you fail to separate the two expenses, then financial planning will become increasingly unmanageable every day.
2) Financing Capital Expenditure Out Of Cash Flow
Many small business owners finance major capital items out of cash flow rather than using cash flow on the lifetime of a purchase. Only finance items out of your day to day working capital if you intend to sell it in the short term. But if you are buying a large piece of machinery with a ten-year life span, then you should look to finance it for the same amount of years.
You should measure your cash flow with your spending so that your company doesn’t end up in a bind if customer payments are delayed or supply chain issues turn up. Don’t fall into the trap of going out and buying a flashy car like a Mercedes Benz from one good quarter, unless you are confident that your strong sales will continue.
You should also form a good relationship with your bank manager so they can help you with your financial planning. Banks are more likely to lend you money when your business is doing good, so you should take advantage of this to properly finance any capital expenditure needed to expand your business further. Additionally, make sure that you secure an overdraft when you don’t need it so that you have a safety net when you hit a rough patch.
3) Not Establishing An Emergency Fund
If you have no savings available in your bank account, you could find your business quickly swallowed up. A majority of businesses fail during the startup phase due to the lack of or misuse of capital. That being said, it’s important to have an emergency fund in the event of an emergency.
Start putting away money into your emergency fund as soon as the cash rolls in and grow your fund as the business grows, so that you can survive during slow periods and stay one step ahead of the game. The more money you put away, the more you will force yourself to get by with what you have.
Many advisers recommend that your emergency fund should cover up to 3-6 months of operating costs on hand without you having to incur new or additional debt.
4) Paying Too Much Tax
Every business has a legal responsibility to pay taxes, but some businesses end up unknowingly overpaying taxes, simply because they don’t understand the complicated tax system or the business isn’t structured properly.
What small business owners don’t realize is that they could end up saving more money for their business by hiring a good accountant to help with taxes and savings. Staying organized and maintaining the order of receipts and financial documents could also help make this process easier.
5) Cutting Costs Rather Than Increasing Revenue
Cutting costs is one of the first things on a business owner’s mind when looking at how to improve profitability. That’s all very well, but there is a limit to which expenses can be cut- zero. And then you start losing business. Ultimately, expenses should be viewed as a resource in generating income. Not to be wasted but used productively to maximise revenue.
On the other hand, the opportunities for revenue growth are endless, assuming you manage your growth within the limitations of your cash flow. What it boils down to is understanding why you aren’t generating revenue and making adjustments without using extreme cost-cutting measures. You should consider the driving forces of revenue, which in most businesses are:
- The number of customers
- The number of times those same customers bought from you
- The average sale you made each time a customer bought from you
Put strategies in place to increase each of those critical measures, once you understand the driving forces of revenue.
6) Failing To Plan
Some small business owners are forced to make decisions based on guesswork because they do not have a working budget or cash flow forecast which is rolled over on a quarterly basis (on a minimum). How would you be able to run a business without a good idea of the direction you want it to head, or what you want to achieve? It may sound so simple but it’s so important to the success of a business.
You should create a budget plan with the following information and present it on a monthly basis:
- Sales- Break down as product and service line and calculated as the number of sales multiplied by average sale value
- Variable costs- Costs vary with sales and are driven by sales forecast
- Fixed costs- Taken from recent financial statements and adjusted for expected increases
Create a cash flow forecast to estimate your cash position in the future after you have completed your budget. Consider how long customer payments take, how long you take to pay your suppliers, how fast you turn over inventory, any loan repayments due and any estimated capital expenses not appearing in your budget’s profit and loss account. You will be able to look into your business cash inflows and outflows, and thus give yourself enough time to financially prepare your business. If you are looking at applying for a business loan, you should also complete a budgeted balance sheet.
You can help your small business grow and stay on the path to success with careful financial planning.
Go to our contact page to arrange a free consultation with one of our Accountants in Gold Coast.