risk ferrymead accountingMany small business owners are entrepreneurs who went into business seeking freedom, a better lifestyle, more money or simply because they wanted to run their own show. Financial acumen is rarely high amongst the skills possessed by such people. As such, it is only to be expected that business owners make financial mistakes which can jeopardize their dreams. Here are four of the most common mistakes and how business owners can avoid them.

1) Failing to plan

Few small businesses have a working budget and cash flow forecast which is rolled over on (at least) a quarterly basis. As a result, they make decisions based on guesswork and have no idea whether their business’s actual performance is better or worse than what they expected. A solid budget requires the following information, ideally seasonalised and presented on a month by month basis:

  • Sales – not just a lump sum figure, but broken down by product or service line and calculated as number of sales multiplied by average sale value
  • Variable costs – these are costs that vary with sales and as such, 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 budgeted profit and loss account, you should then create a cash flow forecast. This differs from the profit and loss budget because it is looking at the cash inflows and outflows. As such, it needs to take account of 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 profit and loss account.
For a thorough budget that could be presented to a bank for the purpose of raising finance, you should also complete a budgeted balance sheet.

2) Financing capital expenditure out of cash flow

As a general rule, and to the extent that it is possible, it is good practice to cash flow the lifetime of a purchase. By that we mean this: if you are buying stock to sell in the short term, then 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, then you should look to finance it over ten years. Similarly, don’t fall into the trap of many small business owners where you have a good quarter and go out and buy yourself a flash new car – out of cash flow. Unless you are confident (and have evidence to back it up) that your strong sales will continue, you could find yourself in a cash flow bind if you empty the bank account to buy new assets every time you find you have a bit of surplus cash.

Form a strong relationship with a bank manager and keep them up to date with your plans. Often, the banks will be happy to lend when times are good for your business and you should take advantage of that to properly finance any capital expenditure required to expand your business. Similarly, the best time to secure an overdraft is when you don’t need it. The banks will be more willing and able to help you out and then if you hit a rough patch, you have a safety net.

3) Cutting costs rather than driving revenue

When considering how to improve profitability, many business owners resort to hacking at costs. That’s all very well, but there is a finite limit to which expenses can be cut – zero. And then you have no business. On the other hand, the opportunities to grow revenue, assuming you manage your growth within the constraints of your cash flow, are limitless. 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 the drivers, you can put in place strategies to increase each of those critical measures. Another thing to be aware of when reviewing costs, which, of course, is still a valid strategy, is knowing where to cut. For example, too often businesses cut back on marketing which can often be the last place you should be making cuts. Similarly, a knee jerk reaction to cut 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.)

4) Running your business from a spreadsheet

Quite possibly the most important to avoid of all of the mistakes listed. In this era of Cloud accounting solutions accurate management information integrated with daily bank feeds is readily available. Not to take advantage of such information is to run the business by the seat of your pants. Yet many small businesses persist in keeping their records on a spreadsheet or worse, in a shoe box! Talk with your accountant today if you feel that your accounting records are inaccurate, unhelpful or obsolete. In fact, your accountant can help you avoid all four of the key financial outlined in this article, helping to set you up for more profitable days ahead. And just for a shameless plug, we at Ferrymead Accounting are both an MYOB partner practice as well as a Certified Xero practitioner… so we will always give you impartial advice to help you choose what’s right for your business!

te whare tapa whaa ferrymead accountingAs a SME business owner it is easy to get caught up in the day to day running of operations, the sales, the staff, the finances and clients.

Whilst it's vitally important to ensure that this side runs smoothly, it's equally important not to neglect the most critical element of all.....personal wellbeing.

Whilst there are lots of models dealing with a holistic approach to wellbeing, one of the ones I favour, both for its ease of understanding and its graphical imagary is that of the 'te whare tapa whā'. For those of you outside NZ, it means the four cornerstones or walls of the house.

This model simply, and easily, graphicly represents that the four cornerstones of health and wellbeing; your psycological health, spiritual health, physical health and family health need to be strong and in balance to hold the roof....If they are not, the roof topples and the building falls.....

In applying this to life as a SME business owner, it is important to ensure that you, yourself, are not personally neglegting these cornerstones. After all, if your health and your life is in balance, you are not only giving your business the deep and stable foundations required to protect it from the challenges faced on a daily basis, but also giving a strong and stable platform for its future growth.

As an advisor to my clients, this is something I actively encourage many of them to work on....as, whilst the numbers are important, if the owner's life is out of balance, its highly likely that their business will be out of balance as well.

It's an unavoidable fact that as the owner manager of an SME business, your personal wellbeing is inextricably linked to your financial wellbeing.....and sometimes understanding this, and putting steps in place to restore your personal balance is both the simplest thing to realise yet the hardest thing to do.

A version of this was originally posted on our company facebook page, click on the link below for more thoughts and musings, and if you like what you see, don't be afraid to like our page!