2020, the year that tested everything you knew about running a small business.
As exciting and fulfilling as it is, financial risks and challenges are part of doing business. But any company can fail by making financial errors when it comes to saving. That reality can hit hard in the face of something like a global pandemic.
If this year has proved anything, it’s that saving money can save your business. While financial pitfalls can be predictable, there are times when you’ll encounter them unexpectedly. They can happen swiftly, and they can be ruthless.
Taking a disciplined approach to your savings protocol from the outset, can be the make-or-break factor in keeping your small business afloat. On World Savings Day (31 October), here are four common mistakes that small businesses and start-ups make in their savings processes, and how you can avoid them.
Not having cash in reserve
Many entrepreneurs don’t realise the importance of having a cash reserve. Or, they put off starting one until they feel they can afford to do so. A cash reserve is essential for your business. It helps you pay employees and suppliers during tough times. It acts as a buffer if clients pay slowly. And it can get your business through a downturn. You want as much financial cushioning as possible.
Even start-ups should create a cash reserve immediately. Figuring out a number for your cash cushion depends on what is comfortable and achievable for you.
Here’s a quick calculation: First, add up your average monthly expenses. Next, decide how many months’ worth of expenses you want in reserve. Some experts advise three months, others six. Once you’ve settled on your numbers, start transferring the money into a separate bank account. Keep building until you reach your amount, and don’t touch it unless you absolutely need to.
There is a growth cost to this – the money you save cannot be used to bring in new clients or fund your business. But it will ensure safety during challenging times.
A lack of recordkeeping, forecasting, and budgeting
Most small business owners take a casual approach to accounting, keeping their actual invoices and receipts in a dedicated drawer and monitoring their finances on a spreadsheet or through their bank statements. This informal approach makes it difficult to track your financial performance, so that you’re fully prepared for anything that threatens to derail your business.
Without proper, real-time accounting information, you have no clear picture of your cash flow position, and you won’t have a sound savings plan.
Invest in a modern, cloud-based accounting solution that enables you to accurately record every transaction in your business. It’ll give you the financial insights you need to manage cash flow (ensuring that you have more money coming into your business than going out). This gives an accurate idea of how much you can put into your reserve account every month.
Office space costs money – rent, electricity, phone and internet charges, refreshments, stationery, insurance, maintenance. All of this burns through profits and will hinder your ability to save.
The introduction of remote working this year has saved businesses a lot of money. Try and work remotely for as long as you can. If you’re concerned about team morale and communications, have a daily video catch-up call. Or rent a shared office space for a few hours a week, so you can get together face-to-face.
Making financial commitments to things you don’t need
Every business pays for little things that can add up to big savings. Leaving lights on. Keeping machinery running when not in use. Printing. These eat into your profits, making it harder for you to put cash into reserve every month, but they’re easy to change.
Go green. By switching off lights at night, putting your printer into sleep mode (or going paperless), and turning off all computers, you’ll reduce your electricity bill. Focus on the essentials rather than the nice-to-haves. For example, you need reliable Wi-Fi, but do you need an expensive coffee machine that needs a refill every week? The aim is to reduce costs and cut overheads, without sacrificing sales.
All small business owners make financial mistakes, which impacts their ability to save. The key to smart saving is to calculate the value in all the tools you use, and cut or replace those that aren’t giving you a good return on investment. Planning your budget, tracking your income and expenses, and consulting with an accountant can help you to put together a sound savings plan, and keep your business on a steady footing when the road ahead gets bumpy.