As a small business owner, you are required to do many things in your business. But “Financial planner” often falls by the wayside, overtaken by other more pressing matters like procurement and customer service. But ignoring this important aspect of your business can suddenly land you in trouble. To avoid this position, simply take note of these five common money mistakes made in small businesses.
Mistake 1: Letting cash reserves dip too low
Just because your business is no longer in start-up mode doesn’t mean you can ignore your cash flow commitments. Business owners need to understand that sales and cash flow are two different things: While sales and deals may be flowing if you haven’t been paid upfront for goods or services dispatched, you won’t be able to cover interim expenses that require cash on hand. So if you’re growing, that’s great. But make sure you have sufficient cash flow to fund growth pressures like increased salaries, more staff and increasing overheads. The best way to combat this threat is to ditch the ostrich mentality and (right from the start) keep track of expenses, debt and costs. Now accurately anticipate your cash flow requirements and revisit this monthly.
Mistake 2: Ignoring the budget
Your budget is your financial roadmap. It will guide you on existing cash flow, upcoming expenses, incidentals and monthly or annual payments like insurance and tax. It will also give you a bird’s eye view of what your estimated cash flow will look like in any given month. Helping you understand if you can make that big growth purchase or if you should hold out for a stronger month. Your budget should also take interest commitments into account, as this can rack up quickly and put your finances under pressure. A rule of thumb is to stay on top of this information and create good book-keeping habits. Accounts can be a real bugbear for an entrepreneur, but without accurate accounts and a budget to match, your business will very quickly get into trouble.
Mistake 3: Waiting to get credit
Ironically the best time to seek credit is when your business is in a solid position for sign-off. The healthier your finances, the better position you’ll be in to convince a lender that you can keep up with their repayment terms. There are various types of lenders from traditional banks, to cash advance providers and speciality lenders. Each lender will have their own focus, interest rates and terms which will vary widely. Make sure you do your research (ahead of time) to find the right financial partner to take your business to the next level.
Mistake 4: Mixing business and personal finances
Just because you have a small business doesn’t mean it can be merged with your personal finances. You need to ensure that you are creating early systems that will be able to grow with your business. If you keep your company and personal finances in the same accounts, there is no way you can realistically keep track of what’s going in and out your account. By setting up separate accounts and credit cards, you will also be in a better position to handle tax demands and foresee upcoming budgetary requirements. This is also an essential step if you want to get a loan or cash advance in the future, as the lender will want to have a clear picture of your company’s finances.
Mistake 5: Under-pricing your product
A common question facing small business owners is how to price your product. There is always the temptation that in order to attract new business, you should go in low. But this can be risky. Always ensure that you take into account the full cost of your product. It’s not only about the manufacturing and profit aspects but also includes the cost of labour and other overheads. Bear in mind that once you have set your pricing, you should relook this (at least annually) to make sure you are adjusting to inflation, supplier demands and market conditions. Setting your pricing is a delicate balance between being competitive and also making it worthwhile for your business. So don’t undervalue your service, and if need be, back your product with a solid marketing communication strategy that justifies your value proposition to your customer.
The bottom line
Luckily there have been many before you who have tried and tested the long and dusty road that is being an entrepreneur. So learn from those who came before and avoid their mistakes. And if you need a little help recalibrating, contact Merchant Capital for quick access to the working capital you need to see you through.