Many small businesses make the same mistakes early on that come back to haunt them a few years later. This is because of all the roles that business owners take on, managing their finances and being diligent about record-keeping are among the most challenging.
A crucial contributor to business success is accurate forecasting. Businesses have a better chance of making it through the tough first years if they can forecast things like cash flow and expenses while putting contingency plans in place for things they can’t forecast – like unexpected financial knocks or insurance-related events.
While one big financial event can result in business failure, the accumulation of small bad decisions can also bring a business to its knees. Here are some financial pitfalls small business owners should avoid at all costs.
Neglecting to budget
When it comes to business finances, ‘winging it’ is the worst strategy. Budgeting is critical. It helps you manage your finances and ensures that you’ve planned for recurring but often overlooked expenses like insurance and tax. It also keeps wasteful spending in check and provides insights into where you can cut costs.
Let’s say you own a mobile ice-cream parlour. You’ll have fixed expenses, like truck repayments, wages, and raw ingredients. You won’t be able to reduce these much. But by keeping an eye on your variable expenses, you may notice that your cone supplier is charging 25% more than it did three months ago – an indication that it’s time to find a new supplier.
A budget will also help you to plan and save for the quieter winter months and to identify expenses that you can eliminate altogether – like the certain sprinkles very few people order.
Without a budget, it’s only a matter of time until you run into cash flow problems.
Not managing your cash flow
Your cash flow is closely linked to your budget. However, many small business owners confuse cash flow with sales. Yes, you might have a lot of orders for ice-cream cakes, but until you get paid for those orders, you’ll have to pay wages, taxes, petrol, and your sprinkles bill out of your own pocket.
There are ways to encourage prompt payments, like invoicing as soon as an order comes in, using cloud-based accounting solutions, and adjusting payment terms with your suppliers. Your software can also automate payroll, invoicing, and tax reporting, and keep you compliant with all financial legislation, so you can focus on more important things in your business.
If all else fails, you may have to take out a loan to keep your ice-cream truck on the road – and the worst time to ask for funding is when you need it most.
Also, keep an eye on government communications such as the President’s State of the Nation Address and the Finance Minister’s Budget – both in February in 2020 – to learn about new tax regulations for the year. And use your accounting tools and the advice of your accountant to ensure that you are well prepared for tax filing season.
Waiting too long to secure funding
If you’re already struggling to pay your bills because of a cash flow shortage, you’re going to have a hard time convincing the bank to lend you money.
The best time to secure funding is when you don’t actually need it and you’re already in a strong financial position. This way, it’s easier to convince lenders that you can repay your debt.
The not-so-ideal alternative is to use your credit cards to fund the cash flow shortfall, but a word of caution: don’t use your cards unless you can pay the balance, in full, every month. If not, you’ll quickly build up debt and get stuck in a perpetual cash flow-negative cycle.
Rule of thumb: Don’t spend money you don’t have.
If you need money fast, alternative lenders are a good supplementary option. But, in an ideal world, you should try to avoid this altogether by building a financial safety net.
Not saving for a rainy day
You’re in the ice-cream business, and very few people want ice-cream on rainy days. What’s more, since you operate a seasonal business, you’ll need savings to get you through the colder months or help you recover from an unexpected emergency – like a broken-down truck or a faulty freezer that turns all your product sour.
Ideally, you should have at least three months’ worth of expenses saved up. You’ll want to keep this money in an easy-access investment account so that you earn higher interest but can also withdraw the money at short notice.
Don’t, I repeat, do not use your credit card to cover big unexpected expenses. It’s likely that you haven’t budgeted for the extra repayments, which puts you back into cash flow-negative.
Emergencies happen. It’s part of doing business. Make sure you’re prepared by keeping a tight lid on your spending.
Not being frugal
When you’re just starting out, you really don’t need the latest gadgets, swanky office space, or expert hires. Try to make do with the bare minimum: work from home or a shared office, use your ice-cream van until you really have to renew it, and use skilled freelance cake decorators instead of hiring full-time resources.
A good measuring stick is to ask if the expense adds to your bottom-line or will generate revenue. If the answer is ‘no’, then don’t buy it (goodbye, fancy neon signage and roof-mounted state-of-the-art boombox).
Get really good at record-keeping, but if the thought of admin makes you want to eat sour ice-cream, hire an accountant to do it for you. They may even help you find tax breaks that you didn’t know you qualified for.
Receipts and invoices should be processed immediately not ‘when you get around to it’. Scan them as you receive them on the go from your mobile phone. If you’re using cloud accounting solutions, they’ll be uploaded and categorised automatically. Or you can link your software to your accountant’s and let them handle the admin.
Maintaining a healthy bottom-line and staying cash flow-positive is key to business success. Review your finances regularly, to make sure you’re on track to meet your goals. If not, make some changes.
AUTHOR | Viresh Harduth, Vice-president, Small Business, Sage Africa & Middle East