5 common money mistakes small business owners make
Small business owners are required to wear many hats – marketing, legal, operational, procurement and finance just to name a few. It’s impossible to be an expert in all of these fields so the challenge is to be able to grasp the key elements of each one.
In most cases, Finance tends to be the one that is left to an external accountant or book keeper to manage. Take the example of a small business owner I talked to recently who was struggling to pay their tax bill. They had waited to the end of the financial year when their accountant calculated what their tax liability was for the year. This business owner had not separated their PAYG amounts from their cash receipts. To make matters worse, they had not reviewed their numbers since their last visit to their accountant twelve months ago.
When it comes to finance, these are some common mistakes all small business owners can avoid by making some simple changes:
1. Only one business bank account
Having only one business account makes it hard to track your numbers as it will contain a mix of GST receipts as well as PAYG tax. This may lead to spending money which belongs to the tax office. Avoid this mistake by opening a separate bank account where you can hold your GST receipts and PAYG tax payments separately.
2. Not reviewing your numbers regularly
As a small business owner it’s important for you to be in control of your cash flow. One simple way is to review your bank accounts weekly. Schedule thirty minutes on a Monday morning to check what has come in and gone out of your business bank account for the week. You will soon have a better understanding of what it costs to run your business.
3. Focusing on profit and not cash flow
Profit is the surplus of what is left over after the bills are paid. Profit provides an overall picture of the business and is usually reported monthly. What it doesn’t show is what money may be tied up in inventory. It also doesn’t show what bills are outstanding or what money is still owed by your customers. You can have a profitable business but still be short of cash – so it is important to focus on both.
4. Not having a forecast of cash flow
It is amazing how many small businesses still operate on a month to month basis when it comes to cash flow. Take the stress out of managing your money by spending an hour to develop a high level cash flow forecast. Start by calculating what it costs to run your business on an annual basis. Look over your bank statements form the last 12 months to get an understanding of when your major payments are due. Do you have enough cash reserves to pay for these major bills when they fall due?
5. Using the forecast as a target and not a guide
Forecasting is a very difficult part of any business, and in most cases people do not like the process because it can become such an emotional exercise when the forecast is wrong. The value of a forecasting process is that if reviewed regularly it can become quite a powerful tool in understanding the drivers in your business. The key is to have a process when the actual results vary from the forecast. Use your forecast as a guide and review it regularly and revise accordingly.
Being in control of your money does not require you to understand complex calculations and advanced mathematics. It’s more about the habits you create and the self-discipline that is required to maintain these habits. Like the small business owner who twelve months ago started holding their GST and PAYG amounts in a separate bank account. They have enough in reserve to make their tax payments. They also have a clear understanding as to what their profit is. They have started reviewing their accounts receivable and accounts payable listings to make sure that they don’t have excess cash tied up in creditors.
Which of the common mistakes above do you want to start avoiding?
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About the contributor:
As a Finance Analyst, Author and Speaker, Robert Bihar runs information sessions for parents on how to teach their kids good money habits. He also runs one-on-one sessions for small business owners on how to identify bad money habits and how to fix them. Website: http://www.robertbihar.com