Did you know 60% of all Australian small businesses fail within the first three years? Poor financial management is a significant problem contributing to Australia’s high business failure rate. Small business owners often take it upon themselves to manage every aspect of their business to avoid additional costs. They might even run their business with a learn-as-you-go attitude. That is, they make mistakes, learn from them, iron them out and move on. That is an acceptable approach with regard to some types of business mistakes. However, financial mistakes can prove to be costly and even irreparable and best avoided. Here are five common financial mistakes you must avoid as a small business owner.
Running a Business Without a Budget
According to a 2018 study conducted by Clutch, which surveyed 302 small business owners, over 60% of small businesses failed to make a budget in 2018. The smaller a company, the more likely it was that the owner skipped making a budget. The reason – many business owners viewed budgets as restrictive elements that prevented their business’s growth.
The truth is, when you don’t create a budget, you create more challenges for the business.
A budget can help you stay focused, make more money, and act as a measuring stick to evaluate your business’s goals and performance. With a budget, you can monitor your finances, avoid reckless spending, and stay on track. If your expenses go up in a particular month, a budget helps you understand why and how to fix them.
Spending Big During the Early Days of your Business
Starting a business is an achievement that you would like to boast about. It’s natural to want your clients and customers to have a positive first impression of your business. So, you naturally feel inclined to spend a bombshell on expensive purchases. For example, the best and latest technology and software, a flashy website, and impressive and expensive interiors.
It’s always wise to start your small business with the bare necessities. Before making expensive purchases, ask yourself if the purchase is going to help your business grow. Could you put off each of those purchases until after your business takes off successfully? Shelf nice-to-have things for when you accumulate enough disposable income.
Forgetting to Save
Your business might take off smoothly, and you might see profits coming in earlier than you presumed. How do you use those profits? Do you put away some money for a rainy day? Many business owners fail to use their earnings wisely, which eventually could lead to a shortage of funds.
Smart business owners understand the need to set aside money for a rainy day. Money put aside in savings will insulate your company from unexpected emergencies like dry seasons when sales are slow, but you have bills to pay.
What you save today will tide your company through difficult economies. Many companies survive because they regularly set aside resources to survive bad economies and expand while companies around them falter.
Your savings will also help you buy the best intellectual knowledge and products to get ahead of your competitors.
Finally, successful companies with considerable savings have the opportunity to give back to the community within which they operate.
Failing to Pay Close Attention to Loan Interest Rates
Most business owners start their business on loan. There’s nothing wrong with that – it’s the best and most convenient way to get your business, shore up cash, and pursue growth. But in your endeavour to start your business, don’t miss the fine print – the interest and other fees associated with your loans.
Before you start looking for a loan:
- Understand how much money you require.
- Decide how you will use it.
- Calculate what you can afford to repay each month.
- Understand the pros and cons of secured and unsecured loans.
- Choose wisely between a fixed and variable interest rate.
- Understand the actual cost of your loan by comparing all the fees and extra charges.
Not Managing Cash Flow
As a small business owner, you might forget that even if your business makes a profit, it does not mean it is cash positive. A positive cash flow means that more money is coming into your business than going out.
Managing your cash flow is critical because it gives you an accurate figure of how much money you have at any point in time – crucial to making essential business decisions. Plus, you have a better understanding of where you are spending your money and how much you spend.
Some kinds of business mistakes are harmless, but financial errors can lead to businesses shutting down. As well as staying on top of your financial situation, consider investing in public liability insurance for your small business. Public liability insurance can protect your business and your finances in case of an unfortunate incident. For more information on how public liability insurance can save your business from ruin, click here.
EasyBooks. 2019. 4 Reasons Why Cash Flow is Important to a Small Business. [ONLINE] Available at: https://www.easybooksapp.com/blog/reasons-why-cash-flow-is-important-to-a-small-business. [Accessed 12 April 2021].
Vincents. 2021. The Importance of Cash Flow Management. [ONLINE] Available at: https://vincents.com.au/cash-flow-management/. [Accessed 12 April 2021].
CommBank. 2021. What you need to know before applying for a business loan. [ONLINE] Available at: https://www.commbank.com.au/articles/business/before-you-apply-for-a-business-loan.html. [Accessed 12 April 2021].
Business News Daily. 2020. A Guide to Choosing the Right Small Business Loan. [ONLINE] Available at: https://www.businessnewsdaily.com/7695-small-business-loan-guide.html. [Accessed 12 April 2021].
Business.com. 2019. Why Every Company Should Have a Business Savings Account. [ONLINE] Available at: https://www.business.com/articles/why-companies-need-savings-account/. [Accessed 12 April 2021].
Clutch. 2018. Why Small Businesses Need Budgets. [ONLINE] Available at: https://clutch.co/accounting/resources/why-small-businesses-need-budgets#:~:text=Small%20business%20owners%20face%20a,obstacles%20and%20long%2Dterm%20planning.. [Accessed 12 April 2021].
Small Business Rainmaker. 2021. 5 Common Financial Mistakes Small Business Owners Want to Avoid. [ONLINE] Available at: https://www.smallbusinessrainmaker.com/small-business-marketing-blog/5-common-financial-mistakes-small-business-owners-want-to-avoid. [Accessed 12 April 2021].