Winning new business is vital to success, but growth hungry SMEs can often be guilty of biting off more than they can chew.
Chasing every new business opportunity that goes past the door can usher in major issues for South Australian SMEs. While new business generation was important, taking on too much work in a tough economic environment was a risky strategy.
Winning new business is vital to success, but growth-hungry SMEs can often be guilty of biting off more than they can chew. Business selection is one of the critical challenges that SMEs face during their growth phase.
Here are some of the most common financial pitfalls for SMEs:
Taking on too much
Small businesses could jeopardise their profitability and viability by taking on too much work. One of my clients worked part-time, around 20 to 25 hours per week, but would continue taking orders from customers even when they didn’t have capacity to fulfill them. They weren’t pricing their products appropriately and with too much time spent completing orders, they lost money and didn’t meet their customers’ expectations.
Business owners that delayed critical bookkeeping tasks could hurt their hip pocket.
Businesses often delay completing their BAS [business activity statement] to focus on serving their customers, but this means they’re left with one large, unbudgeted payment at the end of the year rather than four manageable payments across the year. There are accounting services apps available, like Xero, which sync with the business owners bank accounts to make managing these payments much easier.
Poor cashflow management
Poor cashflow management meant many small businesses had their bank accounts run dry. When a small builder takes on a project, they have to order the materials and subcontract other tradespeople. The business might look profitable on paper but the owner won’t receive their payment from the client for between 90 and 150 days. These businesses should consult their banker and utilise overdraft facilities to bridge the gap.
No growth plan
Many businesses struggled through the growth phase, trying to run before they can walk. We often see businesses become insolvent and wind up because they started expanding their business without ensuring they have a sustainable market or client base. As their costs get higher, their income doesn’t increase at the same rate. Not budgeting for expansion is also a common financial trap for small businesses. Recruitment, marketing, higher stock levels – these are just some of the expansion costs to consider.
Payroll and employment management were not straightforward tasks and small-business owners shouldn’t go it alone. There are many different government regulations, which businesses must adhere to, including minimum wage levels, award rates, superannuation payments and employment and termination contracts. This is best left to the professionals, as employers risk severe penalties and leaving themselves out-of-pocket if errors are made. If they don’t have the expertise, business owners should consult a professional for these procedures.
Robert Paprzycki, Chartered Accountant, Nieuvision