5 money mistakes SMEs may one day regret

A critical part of running a successful business is accurate forecasting. Making it through the tough first years is easier when things like cash flow and expenses are forecast, and contingency plans are put in place for things like insurance-related events that can’t be predicted.

It might seem like simple advice, but many small businesses make the same mistakes early on, and it comes back to haunt them a few years later. Of all the roles that new business owners need to take on, managing the finances and keeping accurate records is the most difficult. It’s not only big financial disasters that cause businesses to fail. The build-up of small, poor decisions can also cripple a business.

Here are some money mistakes small business owners should avoid at all costs.

1. Not budgeting

When it comes to business finances, “playing it by ear” is not the best strategy. Budgeting is essential. Not only does it help you take care of your expenses, but it also ensures that you have enough cash put away for recurring but overlooked expenses, like tax and insurance. It also helps you reduce wasteful expenditure and offers insight into where you can cut costs.

Let’s use the example of a mobile ice-cream parlour. There will be fixed expenses like van repayments, salaries, and base ingredients. These will not vary much. So, keep an eye on the expenses that are variable. You might notice that your cone supplier has increased his prices by 20% over the last three months, which would indicate that it’s time to find an alternative supplier.

Drawing up a budget means that you will also be able to plan and save for your quieter months in winter, and you’ll be able to identify expenses you could eliminate – like flavours few people order.

You’re certain to run into cash flow problems at some point if you haven’t put a budget in place.

2. Freestyling your cash flow

Your cash flow goes hand-in-hand with your budget. Many small businesses confuse cash flow and sales. While you might have loads of orders for ice-cream cakes, until you get paid for those orders, you will need to cover all the expenses – taxes, petrol, wages – from your own pocket.

To encourage prompt payments, invoice as soon as an order is placed, use cloud-based accounting solutions, and adjust payment terms with your suppliers. With the correct software, you’ll also be able to automate payroll, invoicing, and tax reporting, and it will keep you compliant with all financial regulations, meaning you can keep your eyes on more important things in your business.

If cash doesn’t come in quickly enough, you could find yourself needing to take out a loan to keep your business afloat, and the worst time to ask for money is when you need it most.

You’ll want to keep an ear out for government communications like the Budget Speech to find out more about the new tax regulations for the year. To be best prepared for tax-filing season, use your accounting tools and take advice from your trusted accountant.

3. Securing funding too late

If you’re already skipping payments because you’re short on cash flow, convincing your bank to lend you money is going to be near impossible.

The best time to borrow money is when you don’t actually need it and you can present a strong financial position showing lenders that you are well able to repay your debts.

If you’re really in a pinch and have absolutely no other alternative, you could use your credit card to fund the shortfall, but take heed: do not use your cards unless you can repay the balance in full each month. If you don’t, you’ll quickly get caught in a debt cycle that’s tough to get out of.

A good rule of thumb is: don’t spend money you don’t have.

If you need money quickly, one option is to contact alternative lenders. Ideally, you should avoid borrowing money altogether by building a financial safety net.

4. Not having an ‘ICE’ fund

You’re in the ice-cream business, and not many people buy ice-cream on cold and rainy days. Because you run a seasonal business, you will need to have savings to see you through the quiet months, or to help you recover if there is an emergency or unavoidable incident – like your van breaking down, or a faulty freezer spoiling your product.

In an ideal world, your ‘in case of emergency’ (ICE) fund should consist of savings of at least three months’ worth of expenses. This money should be kept in an easy-access investment account so that you earn higher interest but can also withdraw the money at short notice.

Do not use your credit card to cover big unexpected expenses. It’ll result in extra expenses you likely haven’t budgeted for, which will put you back into a difficult cash flow position.

Emergencies happen in every business. Make sure you’re prepared by having contingencies in place.

5. Not being money-smart

When you’re just starting out, see if you survive with the bare minimum. You really don’t need the best and latest gadgets and office space. See if you can work from home or share an office. Drive your ice-cream van until you absolutely need a new one, and try to use freelance resources before hiring full-time ones.

A good way to measure if it’s worth the expense is to ask if it adds to your bottom-line or if it will generate revenue. If the answer is “no”, then simply don’t buy it.

You need to be really good about record keeping. If the idea of admin makes your heart stop, hire an accountant to do it for you. They could even help you find tax breaks you didn’t know you were entitled to.

Receipts and invoices need to be processed immediately; they can’t wait “until you have time”. You can scan them on your mobile as you get them, and, if you have a cloud accounting solution, they will be uploaded and categorised automatically. Your software can also be linked to your accountant’s, and they can handle all the admin for you.

Nurturing a healthy bottom-line and staying cash flow-positive is essential to run a successful business. Check in on your finances often to make sure you’re on track to meet your goals. If you’re not, you can make the necessary changes now.

Your future self will thank you.