Five Fatal Financial Mistakes Small Business Owners Make

We all hate making any kind of mistake, but there’s nothing worse than a mistake that costs you money. This is especially true for the small business owner whose family’s livelihood depends on their adept financial dealings.

We’d like to see all business owners on the Coffs Coast avoid financial mistakes so in this article we are sharing our top 5. Check out the list and make sure none of these mistakes has your name on it.

Mistake #5. Funding personal spending out of gross income

It’s easy to get carried away with personal spending whenever the company bank balance seems to be getting healthy. This can leave the company with insufficient cash flow to cover tax commitments. Don’t live on your gross income, budget around after tax dollars.

Mistake #4. Financing major capital items out of today’s cash flow

Wherever possible it is good practice to cash flow the lifetime of a purchase. What that means is if you are buying a big piece of equipment with 10 years life, then look to finance that equipment over 10 years.

Don’t fall into the trap of buying yourself a Mercedes out of the cash flow from one good quarter. You could potentially be boxing yourself into a cash flow bind down the track. Keep the cash, and finance the car.

Mistake #3. Cutting costs rather than driving revenue

Too often we see business owners looking to improve profitability by simply cutting costs. These savings could be short term if your cost cutting impacts on the quality of your product or service, ultimately leading to a loss of sales.

It’s important to manage costs, and certainly you want to avoid waste. However, it’s equally important to look at how you can increase your sales. Consider how you can grow your client base, get your current clients to buy more and buy more often. These are the strategies that will grow your profits without jeopardising your business in the long term.

Mistake #2. Failing to review the financial statements

Most small business owners (except accountants like us) would much rather get on with the job than sit down with a P&L or (God forbid) a balance sheet. The problem is that you can’t really understand your business until you understand the numbers. Financial statements don’t just tell you whether or not you made a profit this month. They can reveal how effectively you are managing your resources and provide clues to how you can better manage your business.

If you are one of those business owners who just can’t make sense of your financial statements, take a look at our recent blog Making Sense of Financial Statements.

Mistake #1 Failing to plan

This is the #1 financial mistake made by small business owners – and it’s a doozey! How can you run a business without a firm idea of where you are going and what you want to achieve. How can you make decisions if you have no idea if your business’ actual performance is better or worse than you expected.

All businesses must have a business plan and a working budget to function properly. You don’t need to write a 100 page thesis. But you must, at least, have a one page plan that articulates your vision and key goals for the year and a cash flow budget that projects inflows and outflows. Without these two documents you are running blind.

For help getting started with your plan check out our six part video series which walks you through all the steps for creating a business plan.

 

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