6 Common financial mistakes small businesses make

Throughout my time working in the small business sector I’ve seen the business world humble many people. They enter with good intentions only to end up paying a big learning fee to the market. Below are some of the common mistakes I’ve seen small businesses make over the years. I find it good particularly when you are starting out in business to learn from other people’s mistakes. It becomes a thing where you should learn what ‘not to do’ rather than ‘to do’.

1.     ‘Stress test’ cashflows

When businesses reach the financial planning stage they must go through a rigorous due diligence process. This process is designed to determine whether the business is viable or simply a dud. As part of the due diligence process its good to ask the ‘what if questions’. What if suppliers suddenly raised their prices by 5 per cent. What if there’s an economic downturn and people don’t want to spend money. What if a massive buyer/customer goes bankrupt resulting in a sales drop of 40 per cent. It is important to ask these macro and micro questions when you are modelling out a cashflow. When these ‘what ifs’ are not toiled with and factored into the business financial outlook, it can hamper or even have catastrophic effects on the business because you have not considered this potential operating scenario. It is extremely important that during the due diligence process you financially ‘stress test’ the business to see how different operating scenarios will affect operations and viability in the short, medium and long term. Having toiled with the ‘what ifs’ and factored them into your financial due diligence its important to remember that its better to be roughly right then precisely wrong. Time and time again I have seen nano, micro and small business fail to stress test their business resulting in turbulent unjoyful experiences or in some cases their business ceasing.     

2.     Keep cash ‘Cycles Short’

When you are a small business you often don’t have enough working capital to pay business expenses when they fall due. This in-fact is a problem that affects large businesses as well across every industry. It’s important throughout the early stages of the business to keep your ‘cash cycles short’ – when dealing with customers they might want to pay for your goods or services up to 90 days after they’ve received them. For example; If you ran an ice-cream shop and a customer brought 1000 ice-creams at $2.00 dollars each totalling $2000.00 on January 1st 2020. The Business will not be receiving the cash for that order totalling $2000.00 until April 1st 2020. Although the money for the order arrives in April you will need cash in the bank to cover any business-related expenses for that period. To often I see businesses with long cash cycles up to 90 days struggle or cease because they don’t have enough money on hand when expenses fall due particularly in the early stages/years of the business. I suggest keeping ‘cash cycles short’ in the infant years, whether its 7 days or collecting payment upfront. It’s important to do this until you have not only established enough working capital but have build a solid trusting relationship with your regular customers. 

3.     Collect upfront ‘Retainers/Deposits’

When you are a new small business you often just want to get out there and take on whatever comes your way. It is this mentally that tends to get many businesses into sticky situations. You need to be aware of who you are doing business with and have safeguards in place to ensure you are paid for your goods or service. If you are providing a service i.e. cleaning and you’ve been tasked with cleaning a residential property, then I would recommend collecting a deposit upfront prior to taking on the job - same goes for products. As a business you need to be accumulating all the cash you are owed for your goods and services or at least a portion of it. I’ve seen many nano, micro and small businesses fail to have these safeguards in place. Then when these businesses look to pursue what they are owed it is financially irrational do so (which is a huge shame). For example, it may cost a small business $1000 in legal fees just to pursue $300 for a job that they didn’t get paid for. There is an old saying 50 per cent of something is better than 100 per cent of nothing. This is true in every sense of the word and its extremely important when you a new small business.

4.     Monitor ‘GST’

Goods and services tax (GST) is added to the price of most products and services. If you're GST registered, you can claim back the GST you pay on goods or services you buy for your business. You can also charge GST (10%) on what you sell — this is collecting it on the government's behalf. Time and time again I’ve seen businesses fail to properly keep track of their earnings when they are operating. Then they are very surprised when they surpass the GST threshold and a sizeable bill turns up from the tax man. When the letter from the taxman does arrive, I’ve seen businesses completely blindsided by it and many have no financial buffers in place to pay it. Good businesses have systems and processes in place to collect GST on the run. Many small businesses sometimes fall asleep at the wheel when they are purchasing goods or services. They accumulate all these GST credits from doing so and think that their GST position is OK until all those credits are eroded when they make sales or provide their service. Speak to your accountant early and put systems and processes in place to stay on top of your GST. 

5.     ‘Record keep’ business transactions

There’s an old saying ‘to know where you are going its important to know where you have been’. This is very much the case when running a small business. Keeping accurate financial records of your various business transactions is important for several reasons i.e. tax purposes, regulatory requirements and management decision making. There is now a plethora of accounting software on the market that give small businesses the ability to manage, track and record the financial transactions that occur on a daily, weekly and monthly basis and some can do it in real time. A good bookkeeper can also help you properly ledger your business activity. It doesn’t hurt to engage a bookkeeper prior to trading to get their opinion and allow them to put some systems and processes in place for you. As a business owner you will tasked with important financial decisions and you will not be able to make proper informed decisions with no historical or accurate data. Therefore, it is paramount that you have a way to record and collate the financial transactions of your business. Don’t’ be one of the many thousands of nano, micro and small businesses that fail to do so because the consequences can be detrimental to the business.  

6.     Build ‘financial buffers’

Every business at some stage will go through highs and low, peaks and troughs but it is the good businesses that tend to come out the other end virtually unscathed. What separates these good businesses from others is that they are financially prepared for lows and troughs. Many small businesses don’t plan to fail they simply fail to plan. Have you ever thought life was going just fine then suddenly, an unexpected event/expense pops up like a flat tyre? Only to realise you cannot replace that flat tyre until your next pay day. Now, because of that flat tyre you now don’t have the ability to get to work or take the kids to school. This is just one example of the consequences which can stem from not having financial buffers in place to pay for that flat tyre when it happens. These type of unforeseen events and expenses can happen in business too but to counter them it’s good to have a financial buffer in place from the beginning or build one over time. I see many nano, micro and small businesses fail to do so. When they make money, they spend it with no concern about the potential rainy days ahead. Plan for the unexpected and put financial buffers in place so that you can ride through the turbulence and not crash.

This is an independent opinion piece by Troyson Bassani.