or many small business owners, it’s difficult enough keeping customers happy without thinking about the stuffy world of finance. But money management isn’t something you can afford to ignore. Doing so can easily send the company off the rails. According to Industry Canada, 3,116 businesses turned off the lights in 2014 because of insolvency.
Here are five common mistakes small businesses can make, which can lead to disaster further down the track.
Ignoring your numbers
Unless you are an accountant, your core area of expertise won’t be in managing financial statements. It is tempting to focus on the practical aspects of your business and leave the accounting until later. This is perhaps the worst possible mistake for a small company.
At the very least, a business should have a bookkeeper who can keep records in order and track basic financial information. This will help you to budget so that you know how much you really have available, and don’t overspend.
A proper understanding of your numbers will also help you see beyond basic top-line revenue, drilling down to look at net profitability and underlying overheads. It’s also crucial when submitting tax returns and financial statements, so that you don’t get on the CRA’s wrong side.
A truly savvy small business will go beyond this, using an accountant to examine the numbers more strategically and understand underlying trends in the business, such as revenue and expenditure patterns, financial commitments and opportunities for growth.
Setting unrealistic financial goals
Your business budget should be linked to a cash-flow projection that helps you understand your expected revenue and expenses over time, but it is important to be realistic about your growth projections. Realistic revenue projections are based on an astute estimate of your market and a look at past data.
Unattainable revenue projections can give you the illusion of runaway growth and lead to inappropriate spending. Be conservative, and don’t let inaccurate guesswork tempt you to take on more debt than is healthy in the short term. This can burden your business and make it unsustainable.
Not preparing for emergencies
Even the most astute financial projection may not account for unforeseen emergencies that could knock your business sideways. A critical component supplier might go out of business, disrupting production. Market conditions might move against you, raising prices and affecting your cost of sale.
You can put contingencies in place, such as hedging against future price increases, but having an emergency fund to cover unforeseen events gives you an extra layer of protection in an uncertain market.
Unless you are a bank, financing customers will get you into trouble. Some companies use discounts for prompt payment or interest charges for late payers. These are supposed to be incentives for prompt payments, not an implicit agreement to allow late remittance. Don’t allow your customers to become de facto borrowers.
Keep a close eye on which companies pay poorly and don’t let them get out of hand. Not paying sufficient attention to your accounts receivable and letting overdue invoices slide could leave you with significant cash flow problems that may be difficult to overcome. So collect aggressively and often.
Not allowing for tax
Small businesses with lax finances can easily get behind in tax payments. This wrecks your financial projections, making it difficult to strategically steer your business, and may also burden you with penalties. A variation on this mistake is to have a separate tax account with money set by, which you then treat as a line of credit, drawing on it in tough times and promising to pay the money back.
Set up regular payments to the CRA based on projected earnings for the coming year rather than on historical earnings. This is especially important in a growing business. By staying ahead of the game, you free yourself from draining administrative and financial burdens further down the line.
Avoiding rookie mistakes like these will increase your chances of steering your business to long-term success. Knowledge is power – and knowing your numbers is the most powerful business advantage of all.