Help in business survival during tough times.
Every business owner has experienced losses because of a small mistake at some point, and that’s why financial planning is so important. Even a minor financial error could put your business in strife and may even force you to shut down operations. The good news is that you can avoid these problems with a solid financial management plan.
Let’s check out a few common financial mistakes businesses make and tips for avoiding them.
1. Having Joint Account for Business and Personal Finance
Your business is separate from your personal life. When starting a business, it’s important to develop the mindset that a business and the owner are separate entities. In this way, the profit you make from sales should go into your business instead of your personal bank account.
It’s crucial to open a separate bank account for your business to deposit the income from your business operations. Equally, you should pay all business expenses from this account. Similarly, you should have separate credit cards for your personal and business use.
If you are investing money into your business, deposit this amount into your business bank account first and record whether it’s a loan or investment. Keeping your accounts separate will let you understand your company’s financial performance by showcasing your business’ profits, losses, and cash flow.
2. Not Making a Budget
Every household makes a budget to plan their expenses and savings. If you make a budget for small household expenses, you should take the time to prepare a budget for your business too! This will help you understand your monthly expenditure, identify unnecessary expenses, and work out how to grow your business.
With a budget in place, your business will have enough money to cover unpredicted expenses that inevitably crop up from time to time. Additionally, it will be easier to set money aside for investment, savings, and your business expansion goals.
3. Not Reviewing Your Financial Statements Regularly
A common misconception about financial reports is that you only need to look at them at the end of the financial year. You should make a habit of reviewing your financial statements at least twice a month. This gives you a glimpse of how your business is performing financially and where you can improve.
Things change constantly in the business world. If you don’t review your finances regularly, you will miss out on the areas you could have improved. It’s important to review your profit & loss accounts, cash flow statements, balance sheets, and other financial reports to understand the funds that are coming in and going out of your business. Integrate your EPOS System with good business management software apps so that it’s easier to track online and offline payments in one place.
4. Not Having Enough Working Capital
Startups and small businesses often face a lack of working capital. You can’t expect to have a regular, stable income when you are just starting anf this can make it difficult for businesses to meet their working capital requirements. Ideally, a business owner should have enough cash to finance the working capital requirements for the next six to 12 months.
This doesn’t mean you need to rely on business revenues entirely, or dip into your savings. Although investing in your business can be a positive thing, using up your savings to fund a venture can be very dangerous.
Here are some ways to get more working capital for your business:
• Take out a loan with a bank
• Apply for a government business grant
• Borrow money from family or friends
• Use profits generated from investments
That being said, you shouldn’t rely on debt completely. Too much debt can put a lot of financial strain on your business.
5. Not Having an Emergency Fund
Most startups fail within one or two years of launching, often because of poor capital management. You can’t run a business without having enough funds in place, and this is particularly important to deal with the small and large issues that will inevitably come up along the way. That’s where emergency funds are important. Putting a significant portion of your income aside for a rainy day may be challenging, but it’s also incredibly important.
A common mistake that businesses make is using all their income for investment, expenses, and working capital. You don’t know what challenges your business will face in the next few months or years. Having enough savings will at least guarantee that you can continue to conduct business during tough times. The prime example of this was the COVID pandemic – many businesses had to shut down permanently because of a lack of emergency funds.
6. Focusing on Cutting Costs Instead of Increasing Income
You can certainly recover some working capital by cutting down on business expenses, but how much? Your focus should rather be on using your expenses productively so that they can boost your income. Think of expenses as a resource you need to generate profit rather than something to be avoided at all costs.
For example, don’t remove marketing from your business strategy just because it will cost you a few hundred dollars. Rather, see this as an investment that can bring in a lot of money if leveraged properly.
If you want your business to succeed, it’s important to pay close attention to your finances. Whether you are running a small business from your living room or own a multi-national company, a solid financial management plan is essential for success.