Although ambitious, many small business owners, who started their ventures to seek freedom, gain a better lifestyle, earn more money, or run their own show, may lack the necessary financial knowledge to make informed decisions from the outset, highlighting the importance of seeking assistance from accountants in Sydney.
Following are four of the most common mistakes small business owners make and how to avoid them.
Failing to plan
Few small businesses have a working budget and cash flow forecast rolled over quarterly (as a minimum). As a result, decisions are made based on guesswork, and it’s difficult to tell if the business’s actual performance is better or worse than expected.
A robust budget should have the following information generated on a month-by-month basis:
- Sales – not just a lump sum figure, but broken down by product or service line and calculated as the number of sales multiplied by the average sale value.
- Variable costs – these are costs that vary with sales and should be driven by your sales forecast.
- Fixed costs – unless there are any significant changes, these can be taken from your most recent financial statements and adjusted for any known or expected increases.
Once you have developed a budget with profit and loss accounted for, you should create a cash flow forecast.
This differs from a profit and loss budget because it looks at the cash coming in and going out. It needs to consider how long your customers take to pay you, how quickly you turn over inventory, how quickly you pay your suppliers, any loan repayments due and any forecasted capital expenditure that will not appear in the budget’s profit and loss account.
Ideally, the budget created should have enough detail to be adequate to present to a bank to raise finance. This should also include a budgeted balance sheet.
Financing capital expenditure out of cash flow
As a rule, it is good practise to cash flow the lifetime of a purchase.
For example, if you buy stock to sell in the short term, finance it out of your day-to-day working capital. But if you are buying a large piece of machinery with a ten-year life span, then you should look to finance it over ten years. This will free up your cash flow.
Another way of protecting your cash flow is to be measured with your spending. If you have a good quarter, don’t be tempted to purchase an expensive item (such as a car) with surplus cash unless you are confident (and have evidence to back it up) that your strong sales will continue.
Another recommendation to safeguard cash flow is to form a strong relationship with your bank manager and keep them up to date with your business plans. Often, banks will lend to you when times are good, so you should take advantage of that to adequately finance any capital expenditure required to expand your business. Similarly, the best time to secure an overdraft is when you don’t need it, as opposed to when/if you hit a rough patch.
Cutting costs rather than driving revenue
When considering improving profitability, many business owners resort to cutting costs. But generally, there isn’t much to cut before the business suffers.
On the other hand, the opportunities to grow revenue are limitless, assuming growth is managed within the cash flow constraints. It comes down to understanding the drivers of revenue, which in most businesses are:
- Number of customers
- Number of times those customers buy from you
- The average sale you make each time a customer buys
Once you understand these drivers, you can implement strategies to increase each of those critical measures.
Another thing to be aware of when reviewing costs is knowing where to cut.
For example, some businesses cut back on marketing, which is often the last place you should be making cuts. Similarly, a knee-jerk reaction to cutting back on travel expenses could see an adverse reaction (a recent study conducted by Oxford Economics and commissioned by the US Travel Association found that 57% of businesses surveyed felt that cutting their travel costs during the recession in the US hurt their business.)
Running your business from a spreadsheet
This is probably the most important thing to avoid for small businesses. In this era of Cloud-based accounting solutions, accurate management information integrated with daily bank feeds is readily available. This technology can relieve stress and worry from managing your business’s finances.
Talk with us today if your accounting records are inaccurate, unhelpful or obsolete. We can help you avoid all four of the critical financials outlined in this article, helping to set you up for more profitable days ahead.
Kreston Stanley Williamson Team
*Correct as of August 2016
*Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.