7 financial mistakes to avoid in your small business
Setting up and running your own small business can be exciting and daunting in equal proportion. Bringing your ideas to life and sharing them with the world can be rewarding beyond belief, so don’t let the nitty gritty stand in your way of success. Here we share five mistakes we’ve seen many a small business make, and highlight how to avoid them.
Not paying yourself enough
It’s stressful enough running the finances of a business, so worrying about your personal finances can create an extra strain where your family and home is concerned.
While we appreciate investment in the business and its future is your passion and can secure future income, you need to make sure you’re paying yourself enough to relieve yourself of any additional monetary stress.
If a small business owner is making decisions with the conflicting interests of business and personal finances in mind, one of them is likely to suffer and that doesn’t need to be the case. Getting the balance right is difficult, so if you’re unsure talk to us and we can help.
Not having enough cash reserves
Most of us don’t have a big rainy-day fund. We aren’t talking about a 3-4 month runaway fund with no income, but just enough that gives us comfort should a customer pay late or a deal goes wrong.
Having these cash reserves provides comfort to know that we can ride the ‘timing differences’ in paying and receiving cash without the constant underlying anxiety. Being distracted during critical weeks when payroll and rent are due and trying to figure out if we must ‘rob Peter to pay Paul’ diverts focus from running the business, developing products and growing the customer base.
Mixing business and personal accounts
We know this is sometimes necessary – paying for things on behalf of one another – we have no issues with it as a matter of necessity, but it’s an accountant’s worst nightmare and HMRC’s joy!
Mixing up your accounts creates an unknown number of tax issues and begins to remove the legal protection provided by creating a limited company. Our primary advice around this is planning, if you know what your cash balances look like in 3-9 months’ time you can plan effectively with the right resources to mitigate any tax issues and create a cashflow that enables the efficient running of both business and personal affairs.
Not planning for tax obligations
We all think that our Corporation Tax bill, VAT bill or Personal Tax bill is months away. In reality they creep up on us very quickly!
From our experience this becomes more of an issue when a business sells B2C (Business to Consumer) and you’re taking the ‘hit’ on VAT. It’s not an uncommon mistake to look at profits based on sales prices rather than net prices. The VAT can often be utilised in working capital, paying staff, or purchasing more stock.
Planning for your VAT bills are important and it’s often HMRC’s VAT department that are more aggressive in chasing outstanding arrears.
If you find yourself coming up against this often, let us know and we’ll help figure it out with you.
Waiting too long to seek credit
Most business can’t find credit when they need it at a start up stage. That doesn’t mean we shouldn’t get it when we can, and much earlier than they do need it again.
Having an overdraft arranged or a company credit card in place is essential BEFORE you realise you need it as it can help provide a buffer and support with your cash reserves.
Banks underwent a flurry of cheap lending in 2020 and 2021 but the belts are getting tighter again and they are becoming more risk averse. Think about what your business might look like in 6-12 months and if you need that additional liquidity for expansion or stock purchases. Applying for these loans and overdrafts can take time and are often distracting so do it when you can.
We’ve had a lot of experience in successfully and securing funding for all types of businesses, get in touch if you want to ask any questions about the best type of funding that will suit your requirements.
Overspending on start-up costs
In the early days it can be easy to get carried away on legal fees, web design, the perfect brand etc. This is all necessary but be prudent with your early spending.
The business doesn’t need the perfect website immediately, your customers will change, your products will get better, create a budget for the evolution of your brand as all of this develops.
The risk in most start ups for launching is minimal, use great resources like https://www.lawdepot.com/ to provide those templates.
Under pricing
Pricing to win work is normal and we all do it when we enter a market with a new product, or we need to try and beat competitors to work.
But use this analogy: Uber and Lyft offering discounts, neither are making a profit and it’s survival of the fittest (or the most funded). Consumer’s don’t always buy the cheapest product, there are many studies to suggest that price is indicative of quality and knowing the quality of your product is important.
Once you start low, trying to increase prices are difficult. You need to convince consumers that what was once cheap is now more expensive but is the same product!
Control Room can help with your financials so you can focus on the business. Get in touch to discuss how we can help you thrive.