Though many small business owners are not willing to accept it, the fact remains that most are not very good at managing the finances of their small business.
Despite planning extensively, the estimates for revenues and expenses can come out inaccurate, so the business owner has no buffer against any financial problem, often struggling on a monthly basis. In a study by CB insights in a survey conducted on a large number of companies, as one of the main reasons for startup failure, approximately 29% of the businesses indicated that they failed because they ran out of cash funds required for running the business.
Here’s a list of some of the most common financial mistakes that small businesses make and how to avoid them:
Trusting your instinct, making incorrect assumptions
Many small business owners do not conduct a detailed cash flow analysis for their business to accurately estimate the revenues and expenses, instead relying on their instincts and using guesswork which is not very accurate.
Often business owners are only looking at the revenues, without considering the expenses involved, including bank fees.
Every business should have a detailed system in place to predict the revenues and expenses for the next few months by using a financial planning software or spreadsheet.
Unplanned increases in fixed monthly business costs
One of the main problems faced by many small businesses is that they sometimes add to their fixed monthly business costs without doing a detailed analysis of the benefits and revenues sources.
Only at a later date are business owners finding that their monthly fixed business expenses are very high. So when the small business owner has to review an item which is to be added to the monthly expenses, it’s better to decide against the increase in expenses in most cases.
Being over optimistic despite failures
Though business owners are trying their best, they will often face setbacks like losing an important client, dealing with a downturn in the economy, or not bagging a large enough order. Many business owners are overly optimistic that conditions will eventually improve and do not take corrective action to deal with the adverse business conditions caused by the loss of revenues. Ideally the business owner can only wait for a week or so, and then should start reducing expenses if the business is to survive.
Relying on others to monitor finances
Many business owners are not financial experts, however often times they blindly rely on others for financial information and decisions can be risky, as the business may run out of money.
The person in charge of finances is an employee who does not have the powers to take important decisions. A business owner should have detailed information on the cash flow, money in the bank, variable expenses, and cash flow projections for the next few months.
Only if the small business owner has complete control over finances can the business stay afloat.
Not setting financial goals
If targets for revenues and expenses are not clearly defined or are not achievable, employees will often do whatever they feel like. If the financial goals are specified by the business owner, employees will work towards achieving these targets as their compensation is often linked. So realistic financial goals should be set based on business conditions, and business owners will often find that they are able to achieve their target, preventing financial problems.