‘’Most startups fail not because the ideas weren’t good, but because of cash flow problems.’’
Small businesses have a lot at stake in terms of their finances. These businesses start off with limited capital all of which has to be invested to make sure their venture sees the light of the day. Since it takes time for the businesses to achieve their breakeven point in terms of profit, every financial decision has to be taken with utmost responsibility.
Well, it is no surprise that most of these ambitious businesses still tend to make financial mistakes. While making a few that can be compensated for later, there are some of them that need to be avoided at all costs.
So, what are these financial mistakes that should be a no-brainer to avoid for small businesses? Let’s get talking then:
Failing to understand that profit and cash flow are two different things
The businesses use an accrual method of accounting which results in a timing difference between profit and cash. The business could be earning profits but at the same time go bankrupt due to low cash. This happens due to various reasons such as long customer repayment period, inefficient management of taxes, etc.
Having a clear understanding of how cash inflows and outflows differ from accounting profit is extremely important for every business. Without a good understanding of it, you cannot make sound business decisions.
Managing records through a spreadsheet
We all are hooked on using excel sheets, there is no denying that. While spreadsheets help you keep everything organized and can be effective in monitoring a plethora of things for your business, they must not be used for managing your entire records.
One of the major limitations to using spreadsheets is that everything has to be done manually. This increases the chances for errors such as duplication of expenses etc. Whereas, accounting software comes with automated features that make completion of books seem like a breeze. It saves time, increases accuracy, and helps in monitoring progress through customized reports.
With cloud-based accounting taking over, businesses that have not evolved are putting themselves at a major disadvantage. Cloud-based accounting solutions facilitate businesses at every step keeping a lifelong record of all the transactions and invoices digitally. You get an accurate picture of your company’s finances and can integrate bank feeds seamlessly.
If you are still keeping your invoices in a shoebox, we want to check up on you. How are you okay? (no pun intended).
Always going for cutting down costs
The struggling phase for small businesses can last for days, months, or even years. Within this phase, they may have to make some difficult decisions. These businesses have a profit state of mind (and that’s great) and when their hands are tight, the first resort is to cut down costs.
But even for small businesses, cutting down costs comes at an opportunity cost. What these businesses often miss out on is the fact that they do not have to necessarily stick to the one means of marketing their business. In order to increase revenue, the businesses can invest in cost-efficient activities such as low-cost advertising, offering discounts or any other lead magnet for customers, etc. for a return in the long run. These incentives can act as a driver of growth for your business.
Sounds like a recipe for disaster, right? Unfortunately, it is one of the most common reasons why many start-ups and small businesses don’t see the light of the day. Financial planning is critical for the survival of every business, be it a small-scale one or a multinational company.
Preparing for the tough times ahead in terms of cash is integral to keeping small businesses afloat. The first step in doing that is financial forecasting. A thorough analysis of the market trends and the company’s finances is required. If you feel like you do not have the right skill set, hire a professional who can draft a complete budget and help you look for financial assistance in advance whenever required.
This will then equip your business to prepare for a cash shortfall (a must regardless of the size and type of your business). It is clearly one of the common financial mistakes small businesses make.
Not involving an accounting expert
Small businesses or startups cannot afford a dedicated accounting department in the beginning. Many of them get enticed by the search engine guru, Google’s expertise. We are all in for you to do your research using the search engine. But do not just settle on the online advice; it can be bogus for all we know. Your business deserves more than that.
This is essentially how businesses end up choosing the wrong accounting method. What businesses running on a small budget, however, can do is hire an accounting expert. An accounting expert can be hired as a one-off service and do the job with their foolproof expertise. Let them set things up for you and if you feel confident enough, you can take it from there, and if not then you can keep coming back to them for guidance.
In a nutshell, there is only so much an entrepreneur can do. Do not shy away from seeking help wherever your business needs it. Your priority should be to make sure the business keeps thriving. Glide through the tough times by avoiding these cardinal mistakes that most small businesses tend to make.
Managing finances not your cup of tea? Book a free consultation with our experts today and you won’t be disappointed. Take our word for it!