Five common money mistakes SME owners need to avoid this financial year

This financial year started unlike any in living memory – the COVID crisis means many businesses are on life support and some businesses are closed altogether. Given this situation, it’s more important than ever to keep your business finances in check.

Here are five common money mistakes that will be particularly crucial to avoid in FY20/21:

1. Bad debt decisions

Debt itself isn’t necessarily a bad thing; it’s poor decisions about how, when and why to take it on that can be costly.

Some common mistakes include:

  • Not taking advantage of low-interest rates to pay down existing debts faster.
  • Foregoing borrowing at current low rates.
  • Not analysing whether debt consolidation would cut your overall interest burden.
  • Not shopping for the best deal when taking out a new loan (many people simply go with their existing bank, which may be more expensive).
  • Taking out the wrong kind of debt.
  • Buying unnecessary, superfluous, “non-business”, i.e. upgrading “business” vehicles that are more for personal use when the business can’t afford it.

Don’t be fooled into thinking that lending stops in a recession either. The Federal government has even implemented the Coronavirus SME Guarantee Scheme to encourage more lending to small businesses.

2. Overlooking government support

Overlooking government grants and assistance is a common mistake for small business. Every year, thousands – if not millions – of dollars in grants offered by all levels of government go unclaimed.

This year, there are even more support measures available to help small businesses survive the COVID crisis, the most notable being JobKeeper.

Check your eligibility for government grants and coronavirus support and apply for everything that’s relevant to your business. It’s as close to free money as you’ll ever get!

3. Super misnomers

“I don’t pay myself super because the business is my retirement fund, and it needs all the working capital it can get.” It’s a common belief among the self-employed.

COVID and the Black Summer bushfires show, however, that even the most profitable businesses can be hammered by something out of their control.

I generally encourage business owners to pay themselves super just like they do any other employee. It’s all about diversifying your assets and risks.

On the flip side is the early access to super. A $10,000 withdrawal might be a lifesaver to survive COVID. But unless you repay it once you’re earning again, that withdrawal could cost you as much as $200,000 in lost earnings come retirement.

4. Misguided space savings

We now know that many businesses can operate perfectly well with a remote workforce. Do things need to revert to the way they were pre-lockdown?

Consider whether the business premises are really essential. Do you need all that space, or indeed any space at all? Can you downsize to smaller and cheaper premises?

A costly mistake, though, is to do so without considering your lease obligations. The devil is in the detail, so check the terms of your lease first.

5. Race to redundancy

Tough times mean making tough decisions to save the business. Sadly, that may include letting workers go.

Don’t make the mistake, though, of thinking that redundancy delivers instant cost savings.

Redundancy generally involves a short-term hit to cashflow: you must pay out all their entitlements, a notice period plus any severance pay to which they are entitled. The longer they have been with you, the higher the payout usually is.

There are also strict rules around redundancy, which can prove costly if they are ignored.

Carefully check the employee’s contract and Fair Work redundancy rules before cutting anyone loose.

Helen Baker, licenced financial adviser and author of “On Your Own Two Feet – Steady Steps to Women’s Financial Independence”