5 Small Business Mistakes to Avoid in 2016
There are any number of things that can have a negative impact on your business. However the most devastating of all missteps you can make involve the mismanagement of your business finances. What better time than a fresh, new year to pull up those sagging financial socks and vow to no longer make these 5 critical small business mistakes.
1. Stop spreadsheet accounting
Of all the small business mistakes to avoid, this is arguably the most important to leave in 2015. Financial accounting for your business is kind of a big deal but hey, you’re smart – you are a business owner after all – you can figure this out right? You probably could figure it all out on your own, eventually.
Accounting for your business is an important job - that doesn’t mean it needs to be your important job and here’s why:
You have better things to do
Spreadsheet accounting is not time efficient and your time is worth money. Figure out what an hour of your time is worth and you’ll see exactly what we’re saying here. Factor in as well that the learning curve for doing it on your own will be fairly steep, taking more of your time that could be better spent elsewhere.
You’re missing out
Chances are that you’re not a small business accounting expert because if you were you wouldn’t be reading this right now. A can-do attitude is vital for any business owner but knowing when to admit something just isn’t your forte is important too. By not using an accounting software or an expert to balance your books you could be missing out on critical errors and opportunities.
Mistakes are going to cost you
Errors in your financials are not so easily fixed and can result in expensive repercussions for an SMB. This is what makes spreadsheet accounting one of the most tangible small business mistakes to avoid.
We are in a golden age of cloud based accounting systems so take advantage! Accurate financial data for your business integrated with your business banking feeds is just a simple click away.
2. Fail to plan, plan to fail
Having a working budget and understanding what your cash flow means is important:
- Essential for proper planning and forecasting
- Avoids decisions based on guesswork
- Indicates current and predicts future performance
- May be required when applying for small business loan from a bank
Developing a simple cash flow forecast and budget will allow you to benchmark your business' performance over time. Is business growing or shrinking? The answer lies in your cash flow!
First off, you need to understand the difference between profit and cash flow:
Profit is the revenue from doing business whether received now or to be received, less all your expenses, whether paid now or to be paid later.
Cash flow is the difference between the actual cash your business receives and the cash required for you to run your operations. Cash is continuously coming in and going out and analysts read these inflows and outflows as a measure of how your business is doing now and to predict how it will keep doing in the foreseeable future.
Cash flow forecasting requires that you monitor your cash so that you can draw trends from them. Some things to consider are how long do your customers take to pay you, how quickly you turn over inventory, how quickly you pay suppliers, any loan repayments due, and any known future capital expenditures. These factors will vary from business to business.
3. Cutting costs rather than driving revenue
Considerations relating to cost can’t be overstated however it’s important to choose where to cut. You get what you pay for so when faced with the choice of going the cheaper, lower quality route or paying a little more and getting the job done right, the answer should be a no-brainer. If you start compromising quality or growth in order to save a couple of bucks you may end up damaging your reputation and your sales will follow suite.
4. Mixing personal & business finances
There comes a point when it’s no longer advisable to keep your business finances and your personal finances intertwined. Having a business bank account will simplify your life immensely and offer you some level of audit protection when tax time rolls around. It also adds to your level of professionalism when dealing with customers and suppliers and overall it just makes balancing your books much less complicated.
A note on credit cards: avoid using your personal credit card to fund your capital expenditures. Sure the perks can be tempting – travel miles, points, and cash back are all great. However, if your business’ financial needs have surpassed your personal credit than you risk seriously damaging your own credit score. You’re better off applying for a small business loan online than trying to finance your growth from credit cards, which leads us to the last of our small business mistakes to avoid.
Many small business owners fall into the trap of financing large assets from their cash flows after a particularly flush period. This is a mistake. If business starts to decline for whatever reason you’ll wish you still had that extra cash as a buffer. Also, lenders – particularly banks are happier to lend when you have a robust cash flow because it indicates your ability to make repayments on your business loan, so take advantage of this and opt to finance large capital expenditures.
Lastly, in our post Improve Your Small Business Cash Flow we explained that the best time to ask for additional funding is before you need it. This way, if your business takes a tumble, at least you’ll have that safety net securely in place to break the fall.
Do you have anything to add to our list small business mistakes to avoid based on your own experiences? We’d love to hear what you have to say. Send your stories to firstname.lastname@example.org