The five common financial blunders SMEs make and how to mitigate them

No matter the size of a business, financial issues will exist. After working closely with small to medium enterprises to alleviate financial stress, we have identified the five most common financial blunders faced – and how to avoid them.

Blunder 1 – Being reactive not proactive about finances

Many small-business owners look at their bank balance often but rarely look further ahead at their financial situation. By future forecasting, you can plan for your financial needs whether that means managing finances to carry the business through a tough month or identifying financial growth opportunities to inject back into the business. In either situation, consider the following tactics: 

  • Start taking payments for some invoices through card, or BNPL (Buy Now, Pay Later like Zip and Afterpay). This action could lead to a significant increase in your cashflow.
  • Secure access to credit that does not have ongoing costs. Finance businesses are always more open to approving those who are not in distress, and, therefore, you can generally secure a better rate.
Blunder 2 – Throwing money at the “problem”

When small-business owners get into financial difficulties, their first solution is to throw money at it with a quick loan. Historically, the lending industry in Australia has encouraged this, promoting fast and easy access to debt. Short term, may help, however it is almost always the most expensive solution and delays the problem.

Solve problems in a more intelligent way. For example, consider a business that takes payment for a $10,000 job on the same day the work is completed, versus waiting for a 30-day invoice payment period. The former injects instant cash into your business versus needing to fill a 30-day cashflow gap with interest bearing debt.

Blunder 3 – Putting their head in the sand and ignoring financial management

In a busy small business environment, it can be easy to turn a blind eye on your finances and its management when you are not an expert. But this can lead to unidentified issues that will put you on the back foot. Make it less daunting by starting small and acknowledge what money is coming in and going out to begin with. From here, work your way up to understanding the various funnels of your business finances to gain more certainty and control.

Blunder 4 – Not understanding the difference between cashflow and profit

Many small business owners tell us they are profitable yet cannot understand why there is never any money in the bank. When owners understand cashflow is simply based on timings of payments in and out, they can work to decrease those timing gaps. Whilst bringing in cash by way of earlier customer payments may not impact overall profit, it can have a huge impact on cashflow.

Blunder 5 – Not being aware of tools they can leverage

A small business could be performing really well but may be unaware of the right tools to help catapult their business. In some instances, traditional providers won’t even provide these services for SMEs. Good providers re-shape the relationship small businesses have with finance through education and insights and provide simple access to the products they could be using.