Top 5 Financial Mistakes Made by Small Businesses
Despite variations in the suggested figures for small business failures, it is still the case that a large proportion of small businesses and start ups will fail. The primary reason for small business failure is often financially orientated.
This article will highlight five key ways a business can prevent itself from falling into a financial state of no return.
1. Financing the Business Based on the Future
Once businesses start to get going, an alarming number base current day spending on future predicted incomes. The allure of growing a business quicker through more extensive marketing activities or increasing staff numbers that could be covered by a return in the future is undeniable.
Another example could be when a business takes out a loan which should be re payable based on future revenue projections. However the cards come tumbling down when business hits a road bump or does not meet financial forecasts. How badly things go wrong depends on how well a small business has created a contingency plan for these situations.
A business should base it’s current spend on present figures to avoid over extending itself.
2. Not Abiding by the Business Plan
So the business started and (hopefully) before that hours were spent slaving away on a business plan to help the business realise its dreams; where is it now? Sticking to a business plan can save a lot of pain and suffering (as long as the plan is detailed and thought through).
The business plan is a road map to financial success if it is not followed or adapted based on a business’s performance, it would like to trying to find your way in the dark with a headlamp as opposed to using a giant searchlight.
In terms of avoiding financial mistakes, all of the points on this page could be avoided through having and sticking to a comprehensive business plan.
3. Too Much Lag Time
For a start up business the thrill of making those first sales can lead to unnecessary and risky sacrifices, such as increasing the terms to debtors in exchange for making more sales. This tactic will hit cashflow and could ultimately be the nail in the coffin if anything unforeseen occurs, it all comes back to thinking about the worse case scenario for the business.
If a business over extends itself to debtors, and then creditors shorten their terms for external reasons, this could leave it having to rely on extending overdrafts or taking out new loans to tide the company over until money comes in from debtors.
This point should also include a note, highlighting that a small business needs to get as long terms as possible from creditors, it is also crucial that it keeps watch over its cashflow.
4. A Business Needs Enough Money to Start With
It seems very obvious when said in this context, a start up needs enough money to get through til it is self sufficient from having paying customers.
This is another situation where that ever useful contingency plan comes into play. A business needs to consider what happens if it cannot get paying customers as quickly as it would have hoped. Any forecast needs to be very pessimistic if it is to consider the worst possible scenario, no business can be made completely bulletproof to external circumstances.
The start up period for most businesses is a very turbulent period, any business that builds up a cash bed before launching is going to have more chance of funding its way out of any troughs it may fall in to.
5. Poor Record Keeping
So the first year the business makes a loss and then in the second year it suddenly starts to look good.
One problem, it turns out that a tax calculation was wrong and the business owes HMRC a bunch of money that it did not realise. This error could occur due to poor bookkeeping or not having an accountant on board.
A lot of small business owners get into business through their passion for a product or service, and a lot believe that the bookkeeping stuff can wait. This fear of bookkeeping and accounting can be alleviated through getting a decent accountant on board, it will hit the business’s profit but if it’s affordable the long term benefits can be huge.
Despite not happening that often an accountant can part pay for themselves through finding an area where the business could save or is even owed money from HMRC. Going back to the above point if a small business calculates financial needs based on having an accountant on board in the first place, then paying for one will not be a problem.
Written by Nick Braithwaite, Marketing Manager, Clear Books – Small Business Accounting Software