You’ve taken the leap towards financial freedom, thrown off the shackles of working for ‘the man’ and started your own business. Hopefully you’ve turned your passion or hobby into your job so that it doesn’t feel like work at all, and it’s all smooth sailing from now on.
Or is it?
You have a mass of skills as a small business operator, but all too often management and in particular financial experience, is an area all too lacking and this can cause problems in 5 common ways.
One – Failure to plan and budget effectively
A complete and thorough business plan must include a detailed budget and cash flow forecast, which includes sales or projected income as well as cost, both fixed such as rent on premises regardless of the actual sales and variable relating to raw materials or wholesale stock. A cash flow forecast must take into account inventory turnover, how quickly your suppliers expect payment and how fast your customers pay you, any loan repayments and capital expenditure required in the future.
Two – Capital expenditure funded by cash flow
After a good quarter or two, it can be tempting to fund capital expenditure out of your cash flow. This can be fine if you are confident that sales will continue at the same rate but should there be any kind of correction, your cash flow will suffer at some stage. So if you’re looking to buy a piece of machinery or equipment that you expect to use over 10 years, a general rule is to fund it over 10 years using a loan, and if the items are to be used in the short term such as stock, financing out of day to day working capital makes good sense.
Three – Confusing cash flow and profit
Some small business owners struggle to see how they appear to have made a profit on paper yet at the end of the year they could have zero cash in the bank to show for it. For those small business owners whose learning curve in financial management is high, a chart prepared by the accountant explaining the difference between profit and cash flow is a useful tool in understanding where you money is going. It can identify gaps in cash flow and comparisons from previous years that provide feedback on the areas requiring attention, such as account payment times.
Four – Cutting costs instead of increasing revenue
You have to spend money to make money, so whilst cost cutting can be important to increasing revenue, cutting them too far can actually be counter-productive. When you understand the drivers for your revenue, the opportunities to increase profits can be limitless. By identifying the number of customers you have, how often those customers purchase from you and their average sale, you can implement strategies to increase one or all of these factors and therefore increase revenue in the process.
Five – Being a slave to the spread sheet
Your accounting records need to be accurate, up to date and easy to access. Don’t rely on an old fashioned spread sheet or worse, a box of receipts. With cloud accounting options and the ability to access and integrate bank statements with accounting software, there are no excuses for outdated and inaccurate records. In this area in particular, your accountant is your best friend, however a strong working relationship and good communication can prevent these common mistakes and many more that hold you back in your journey towards financial success.
We understand that accounting can be frustrating and for many, it is a huge learning curve; however, we also realise it is a necessary learning curve if you want to achieve success in your small business.