As a seasoned business and marketing consultant, I’ve worked with hundreds of small-business owners and have observed common financial mistakes that can negatively affect their success. Understanding and avoiding these pitfalls is critical for maintaining a healthy financial foundation and achieving long-term growth. Here are some of the most common financial mistakes I’ve seen, and how to avoid them.
1. Not looking at the numbers regularly
One of the most critical mistakes small-business owners make is not reviewing their financial numbers regularly. It’s essential to keep a close eye on your financial statements, including the profit-and-loss statement, balance sheet and cashflow statement. Many business owners say, “I’m not good with numbers,” and put their heads in the sand, which is ultimately the biggest financial mistake of all.
Why this matters
Regularly reviewing your financial statements helps you understand your business’ financial health, identify trends, and make informed decisions. It allows you to spot issues early, such as declining profits or increasing expenses, and take corrective action before they become big problems.
How to avoid it
● Schedule regular reviews, making it a monthly routine to review your numbers and understand what they mean for your business.
● Invest in reliable accounting software that can generate detailed reports and provide insights into your financial performance.
● Educate yourself about the basic financial principles and how to interpret your financial statements – this will empower you to make better business decisions.
2. Looking only at their bank account as a means to understand their cash flow
Many small-business owners make the financial mistake of relying solely on their bank account balance to gauge their cash flow. This doesn’t provide a complete picture of your financial situation. It gives you just one angle and can get you in hot water quickly, especially if you don’t have a separate account for tax provisions.
Why this matters
Your bank balance doesn’t account for outstanding invoices, upcoming expenses or other liabilities. Relying on it can give you a false sense of security and lead to cashflow problems.
How to avoid it
● Regularly review your cashflow statement to get a comprehensive view of your cash inflows and outflows. This will help you understand your liquidity and manage your finances better.
● Create cashflow forecasts to predict future cash needs and identify potential shortfalls so you can plan ahead and avoid cash crunches.
● Keep a close eye on your accounts receivable and payable to ensure timely collections and payments. This will help you maintain healthy cash flow.
3. Not seeking advice from an accountant when needed
Small-business owners often try to manage their finances independently, avoiding professional help until it’s too late. While managing your finances in-house can save money, it can also lead to costly mistakes. Don’t be scared to pick up the phone for fear of getting a big bill. Finding yourself an accountant you have rapport with can save you thousands in poor decisions.
Why this matters
Accountants have the expertise to provide valuable insights and advice on complex financial matters. They can help you with tax planning, financial analysis and strategic planning, ensuring your business stays on the right track.
How to avoid it
● Don’t wait until you’re facing financial difficulties to seek professional help. Engaging an accountant early can help you avoid problems and make better financial decisions.
● Establish a relationship with an accountant and schedule regular consultations to review your financial situation.
● Take advantage of your accountant’s expertise to optimise your financial processes, plan for taxes and develop strategies for growth.
4. Failing to separate personal and business finances
Mixing personal and business finances is a common financial mistake that makes it difficult to track business expenses, manage cash flow and prepare accurate financial statements. It might seem like extra work upfront, but it will save you time, money and stress down the line.
Why this matters
Keeping your personal and business finances separate is crucial for maintaining clear financial records and ensuring your business’ financial health.
How to avoid it
● Set up separate, dedicated bank accounts and credit cards for your business to keep personal and business transactions separate.
● Ensure all business transactions are recorded accurately and consistently, using accounting software to streamline this process.
● Instead of withdrawing money from your business account as needed, pay yourself a regular salary to maintain separation between personal and business finances.
5. Neglecting tax planning and compliance
Many small-business owners underestimate the importance of tax planning and compliance, leading to unexpected liabilities, penalties and cashflow problems. Ensure you put money aside for tax regularly so you’re clear about what’s yours to keep and what belongs to the ATO.
Why this matters
Proper tax planning helps you minimise your tax liability and avoid surprises, and complying with tax regulations is essential to avoid penalties and legal issues.
How to avoid it
● Work with an accountant to develop a tax plan that aligns with your business goals. Estimate your tax liabilities and set aside funds to cover them.
● Keep up-to-date with tax laws and regulations, ensuring you comply with all filing requirements and deadlines.
● Take advantage of all available deductions and credits to reduce your tax liability – your accountant can help you identify and claim these benefits.
6. Overlooking the importance of financial forecasting
Many small-business owners fail to create and update financial forecasts regularly, but “if you don’t plan, you plan to fail”. Every bulletproof business has a strategy, and this includes a financial strategy, too.
Why this matters
Financial forecasts provide insights into future revenue, expenses and cash flow, helping you plan for growth, manage risks, and make informed decisions.
How to avoid it
● Develop detailed financial forecasts that cover different scenarios, including projections for revenue, expenses and cash flow.
● Update your forecasts regularly to reflect changes in your business environment and performance.
● Use your financial forecasts to guide your business planning and decision-making, adjusting your strategies based on forecasted outcomes.
7. Ignoring the importance of financial metrics
Financial metrics provide valuable insights into your business’ performance and health – a fact many small-business owners overlook. Having four-to-six key metrics that you understand and can guide your decision-making can be a total gamechanger. You don’t need to be a financial pro, but you do need to understand what good and bad looks like in order to make the best decisions for your business.
Why This Matters
Tracking key financial metrics helps you understand your business’ strengths and weaknesses, identify trends, and make data-driven decisions.
How to Avoid It
● Determine the financial metrics that are most relevant to your business, such as gross margin, net profit margin, return on investment, and liquidity ratios.
● Regularly monitor and analyse these metrics to stay informed about your business’ performance.
● Use the insights gained from financial metrics to guide your strategic planning and operational decisions.
In conclusion
Avoiding these common financial mistakes can be the difference between thriving and becoming another small-business failure. Regularly reviewing your numbers, maintaining accurate records, seeking professional advice, and planning for the future are not just important – they’re essential practices for any business owner determined to build a bulletproof business. Don’t leave your success to chance. By being proactive and informed, you can build a strong financial foundation and ensure your business not only survives but thrives for years to come.
This article first appeared in issue 45 of the Inside Small Business quarterly magazine
