Eight common financial mistakes SME owners can avoid.
Mistake #1 – Not paying yourself
Not paying yourself a salary is so common particularly in the early years when cashflow is unsteady. It may even seem rational when you’re starting but after a while, you need to ask two questions: is there a benefit in what you are doing and are you getting financial rewards? While you may be fine with the situation from a values perspective – you trade off flexibility or working from home for earning less – the reality is that bills need paying.
Mistake #2 – Forgetting about superannuation
Self-employed women rank near the top of the biggest losers among Australia’s working population in teams of super savings. Research, commissioned by the Association of Superannuation Funds of Australia, recently found only 22 per cent of self-employed women contributed regularly to their super: more than half were not contributing at all! Remember, as an employee, you would get 9.5 per cent superannuation (or a bit more) of your salary.
“Because cashflow can be a consuming focus for business owners, they commonly shortchange themselves by not paying themselves superannuation.”
Because cashflow can be a consuming focus for business owners, they commonly shortchange themselves by not paying themselves superannuation. But failing to do this means that if anything happens to the business, there is no superannuation to provide for you down the track. And imagine how much that ‘pot’ with compound growth adding up over time from even small contributions would be.
Mistake #3 – Not managing business cashflow
Businesses require their own revenue (income) to meet their own expenses. Excess cashflow then feeds to your personal ‘spending and saving plan’ through salary or profits or both, feeding your lifestyle and that of staff.
Business cashflow, just like your personal cashflow, requires management. Fixed expenses, variable expenses and socking away some cash in an emergency fund for when income is down are common to both business and personal financial management.
Mistake #4 – Overlooking adequate insurance
Just as insurances are a foundation for your personal financial house, they are relevant for business security too. Business insurance can cover fixed expenses like rent that needs paying even if you were unable to keep the business going due to sickness or death. Business insurances protect against the key people you rely on in your business in case something happens to them. If they fall seriously ill (or die), their absence can affect your bottom line. Revenue protection is about protecting income. It not only provides the everyday cashflow provision you need to keep your business afloat, it is also a key factor in the value of your business. Ownership protection safeguards your share of the business’s value, whether that’s 100 cent or a co-owner. It’s important if you (or another co-owner) decide to leave the business.
Asset/debt protection protects if you have borrowings against your home (or similar) that you would be liable for if something happened to the business. You don’t want creditors coming after your house!
Mistake #5 – Under-estimating your business’s value
Revenue is a contributing factor which determines the value of your business. Without it, your business generally has no value. Profit is also considered. Whether you want to sell, plan this as your retirement pot or are forced to sell, protecting the revenue is vital.
We often don’t think of ourselves or key staff as sources of revenue. Take, for example:
- an employee who is very technically minded and performs a specific role that no one else does. Your business would be in a big hole if that person left. Even if you could bring someone else on, a time delay may be costly.
- an employee who is a really great ‘people person’ and has firm relationships with your key clients. Without that person, the relationships are not there and clients don’t order. No sales equals no revenue. No revenue equals no value.
- what if something happens to you as an owner/director? Do you have all the intellectual property knowledge? Do you manage the staff and keep things ticking along?
Mistake #6 – Failing to have an exit plan
When you have a business, your focus tends to be on its everyday running: sales, cashflow, staff issues, opportunities, building relationships and so on. Rarely, do owners think long-term, to an ‘exit strategy’.
- When do you plan to exit your business and how?
- Will you sell the business to a third party, a staff member, other partner or competitor?
- How does the business retain its value without you?
- What are the implications for staff?
- What are the commitments to premises or other fixed contracts?
- What are the legal costs of closing the business down? Who would pay those if the business becomes valueless?
- How long will it take to find the right sale, transition a handover?
If it is a niche business, it may be harder to sell to the right person. Please don’t think “I’ll deal with it when it happens”, shoving it mentally into the ‘too hard’ basket. This can be too late and can have serious financial consequences, particularly in relation to the health issues. Instead, start with the end in mind and document your thoughts. They can always be fine-tuned.
Mistake #7 – Putting all your eggs in one basket
We live in a world of change. What’s viable – indeed ‘hot’ – right now, may not exist in 20 years. Take, for example, home entertainment.I remember when video stores opened. They were massively popular. But just like The Buggles sang “Video killed the radio star”, YouTube, Netflix and other video streaming services killed off the local DVD stores. Another example is plant nurseries, having to diversify their stock and range to survive climate extremes. The further you are from retirement, the riskier your business’s value. The risk is all the greater if you don’t put money into superannuation (which we know is a common mistake already).
Mistake #8 – Not sorting out legals
People with business partners really need to make sure they have the legal documentation of a ‘buy/sell agreement’ in place, along with insurances. If something happens to you, is your intent for the business partner to get both your business share and your life insurance? What about your family? Would you intend your loved ones to get the life insurance payout and your partner receives your business share, to continue? Sadly, details as obvious as this can be overlooked in the busyness of a business. You should also protect your intellectual property such as logos/trademarks, content, and ensure your contracts are looked over. You will need commercial lawyers for these aspects.
This article first appeared in issue 32 of the Inside Small Business quarterly magazine