The five biggest mistakes small businesses make and how to avoid them
Stacey Price, financial coach, accountant and the founder of Healthy Business Finances shares the biggest mistakes small business owners make and how to avoid them.
With the evolution of cloud accounting software (think MYOB, Xero, Quickbooks Online), business owners tend to sign up to a software subscription under the impression that because they have chosen an accounting system, the end numbers the system spits out are accurate and reliable.
The old saying of “rubbish in rubbish out” has never been more important than when it comes to business owners (who do not have a financial background,) taking on the role of bookkeeper/accountant in their own business.
While those in the startup phase often don’t have spare cash to outsource everything, there are ways to still get help in a more cost-effective way.
Often business owners are completely oblivious to any mistakes.
Here Stacey sheds some light on some of the biggest financial mistakes she has seen:
1. I am just going to pluck pricing out of mid-air
It is such a pivotal part of the success or failure of a business. We had a client come to us wanting some help with her pricing and cash flow forecasting.
No problems, however, by the time we had done the sums, we had to advise the client they would need to sell 200 units a month just to breakeven. And in eight months no units had been sold.
Sadly, the reality was the business was not a viable idea as it stood because the pricing model was just all wrong.
Do some “what if” scenarios to determine if you are comfortable with the outcome before you start your business. Spend 5-6 hours of your time nutting this out, and don’t flush $20k down the drain playing a guessing game.
2. It is too expensive to have accounting software
If we had a dollar for each time we heard this a week, we would be writing this from the Bahamas.
Accounting software that covers payroll, inventory, budgeting, income, expenses and reporting starts at around $25 a month and goes up to around $60 a month.
We had a client sign up to accounting software after much debate and in the first week when she saw her bank transactions she realised she was paying for a gym membership for the past 18 months despite tearing her Achilles and not setting foot inside the gym.
The accounting software was $50 a month and her gym membership was $88 a month. So, her accounting software could have saved her that unnecessary expense.
3. My uncle has taken care of it for me
We love that family (or friends) want to help and support your business, but if they don’t have a financial background be wary of the help they are providing.
We recently had a client pay employees in cash causing issues with end of year payment summaries, superannuation was not being paid for two years, as the Uncle never told them about it, the business was not registered for Workcover despite having four staff and the list of things goes on.
The implications of these mistakes (or lack of advice) has cost the business owner many thousands of dollars in fines and penalties.
There is so much to get you head around when starting a business—financial coaching sessions cover all these topics and more.
4. The level of detail is just not important, so I will do it myself
While yes, you will save on costs to prepare things like cash flows and budgets yourself, often an accountant is far more qualified to get the level of detail you need.
We had one client decide to take matters into her own hands when wanting a bank loan. She walked into her bank and requested a loan, no budgets, no cash flows, no projections, no two-year forecast. The bank simply said no!
Another client did come to us and we spent several rounds of calculations, assumptions, financial reports until we had a complete workbook she could provide to the bank.
With no financial security as her backup, the bank approved her $80k small business loan within 48 hours and said that was the most detailed set of financials they had seen.
5. A shoebox is not a storage system
ATO rules and regulations say that you need to keep source documents and proof of purchase for a minimum of five or seven years depending on your structure.
That is a long time given some receipts fade after about three months.
We had a client receive an audit for payroll tax purposes dating back three years. They were required to provide source documents including contractor invoices to prove the work done.
Keeping things in a shoebox means any kind of audit is stressful and time consuming. Thankfully, the client had all filing cabinets neatly labelled by month and year and we were able to provide everything that was asked.
Financial mistakes cost more than just money. They can cost you in time, stress, family arguments, brand reputation and mental health issues for those involved.
But help is out there and a tailored training session could be all that you need to invest in to get the guidance that you need.
A review and tidy up of your numbers could set you on the right path, and before you know it, those numbers, which are vital to run a financially sustainable business, might just start to make sense.