3 common money mistakes small businesses make
Small business ownership comes with the promise of financial freedom and a better lifestyle. But, too often, poor money management can sabotage the success of even the most talented entrepreneur.
With 40 per cent of small businesses closing within the first four years, we’ve explored three common money mistakes so you can stay on the path to growth.
Mistake 1: Cutting costs rather than increasing revenue
As the saying goes, it costs money to make money, and there’s a finite limit to which expenses can be cut.
So, rather than cutting costs, business owners should consider how to grow revenue.
Alan Manly, an entrepreneur, company director and author of The Unlikely Entrepreneur, says that business owners need to get clear on how they will manage cash flow and where their revenue will come from, early on. While retaining customers is crucial, business owners also need to focus on new prospects.
“I’ve seen small businesses bend over backwards to serve their customers, giving more service than was required, which takes you away from serving the next customer.”
Rather than reducing costs, he recommends:
- Increasing the number of customers that you’re trying to bring in the door.
- Increasing the average transaction size by upselling.
- Increasing the frequency of transactions per customer.
“I’ve seen small businesses bend over backwards to serve their customers, giving more service than was required, which takes you away from serving the next customer.”
Manly adds that bringing on an accountant or bookkeeper can bring phenomenal value to a business, he says. “Having access to actual cash flow can be priceless, because it means you can make quick decisions.”
Mistake 2: Mixing business and personal finances
Failing to separate business and personal finances remains one of the biggest mistakes that small business owners make, experts agree. While it might seem tempting to make personal purchases from your business account or vice versa, failing to keep accounts separate will make the financial reconciliation process complicated at tax time – which can lead to higher accountants’ fees.
Financial separation can also be important when trying to secure a business loan - as financiers will need a true picture of financial turnover - and it can also offer tax benefits and the ability to shield your personal assets in case the business fails.
Scott Harrington, a director at William Buck Accountants & Advisors, has helped hundreds of businesses with their financial affairs. “The mistake many make is seeing the business as theirs and therefore any income as theirs. But the income needs to be offset for many reasons, including tax minimisation,” Harrington says.
It's a similarly common mistake for business owners to underpay themselves. "You'd be amazed at how many business owners work for their staff rather than the other way around," says Sandy Chong, the CEO of the Australian Hairdressing Council and a director of the Council of Small Business Organisations Australia. "A lot of small business owners would own less than their staff."
Mistake 3: Not having a back-up funding plan
Cash flow is vital for small businesses, and Harrington says that it’s important that business owners know where they can turn for funding during lower trading periods.
He recommends that businesses set up a separate savings account, which can be used as an emergency fund if needed. Start by putting money into your emergency fund as soon as cash rolls into your business bank account. This will allow you to survive slow periods and will keep you one step ahead.
Many accountants recommend that your emergency fund should cover three to six months of operating costs, depending on the business type and the potential for revenue fluctuations.
And while that might not be realistic for some businesses – especially in fashion where long production cycles can tie up cash for months – even having a little up your sleeve to get you through the inevitable peaks and troughs of business will help, Harrington says.
Setting up an automatic transfer that sweeps money into a separate account each time your business receives revenue is a great way to get into the habit.
Harrington adds that a seasonally adjusted cashflow forecast can be a valuable roadmap for any business.
“It can also be valuable to identify what can be switched off in your business for a period of time if revenues dry up. This was a valuable lesson for many last year during Covid-19,” he says.
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