Smart financial management is essential for any business, no matter how big or small. However, it can be difficult to get things right, especially if you do not have someone trained and experienced to guide you. Poor financial planning is one of the most common reasons that businesses fail, so the sooner you take ownership of your business’s financial health, the better. Dealing with your finances head-on from the get-go is the best way to set yourself up for lasting success. Careful planning can help you to avoid common money mistakes and shows potential investors that you’re serious. Here are the most common financial mistakes that businesses make and how to avoid them.
1. Prioritising Instinct over Information
Whilst following your gut is generally a good principle, it’s a dangerous game to make assumptions about your finances. It’s vital that you meticulously track your revenue and expenses and closely monitor your cash flow. If a small mistake goes unnoticed for too long, it could prove very damaging for your business. Using accounting software can help keep track of your income and expenses quicker and more accurately.
2. DIY Accounting
Managing your accounts by yourself up a lot of your time and usually is done after hours giving no time to relax and turn off. It’s wise to hire a professional accountant as early as possible. Juggling self-taught accounting with running a small business will eventually result in a backlog of errors, which can prove costly in the long run. Professional accounting services save time, money and stress, allowing you to focus on growth. Outsourcing this task will also give you access to an advisor that you can bounce things off and can give you valuable business advice.
3. Failing to have a Budget
Creating a budget to helps prevent from draining your finances should something go wrong. A clear budget will allow you to reassess your finances should it you require more money and make smart decisions that won’t damage your business.
4. Disorganised Files
The importance of balancing bank statements and keeping receipts in order cannot be overstated. Patchy bookkeeping can cause chaos for your business and result in a lot of trouble, not to mention wasted personal hours trying to resolve the problem. Keeping all of your receipts and cross-referencing your accounts with your bank statements is vital for transparency and future success.
5. Misunderstanding Your Target Market
In order for your business to be successful, you need to understand what your customers need. Knowing your target market helps you to reach them, as well as how to appropriately price your products and services. Here are some questions to consider:
What is your market position?
What need do you fulfill for your customers?
How much value do your products or services provide?
Who is your competition - and what makes you stand out?
Miscalculating prices can prove to be a grave error for a small business, but knowing your market well will help you to figure things out.
6. Hiring Quantity over Quality
Over-hiring is an expensive mistake to make. Hiring employees is one of the most costly parts of running a business, so going overboard is a huge waste of money. It can also damage staff morale and productivity, and lay-offs will only amplify the problem further down the line.
Bad hires are another threat to a small business. Hiring the wrong employee can create an imbalance within the company culture. In turn, this can negatively impact other staff and even damage your business’ reputation. Don’t rush the hiring process. Taking extra care to avoid mistakes can save a lot of trouble in the long run.
7. Miscalculating Expenses
In order to keep your business afloat, you need to know exactly how much cash your business burns each month. Keeping a meticulous record of your expenses allows you to understand where your money is going, and how much you’ll need to survive. Underestimating your cash burn can land your business in hot water, so create a projection of your monthly expenditure and be sure to monitor it closely, making adjustments whenever necessary.
A successful business needs a robust financial foundation, so keep these mistakes in mind. No business is invincible and it really does pay to be cautious and always stay one step ahead.