Here’s some of the most common financial planning mistakes in small business…
The business doesn’t know where their profit comes from
Most businesses have a pretty good handle on their sources of revenue; this is different to the sources of profit.
Often business streams that generate a large amount of revenue are not overly profitable. Many businesses do not accurately calculate the cost of delivering their product or service. Most of us are pretty good at attributing the direct costs, things like cost of goods sold, materials and wages.
The indirect costs are often not dealt with appropriately. In rare cases they are ignored completely, more often they are attributed in a uniform method across the business. This is often misleading. By way of example, if a certain revenue stream requires significantly more space (for production or storage etc.), it makes sense to attribute the cost of the overall space accordingly.
If we know what areas generate the most profit we can focus our attention to those revenue streams.
No consideration for cash flow
Many businesses are profitable on paper, but are unable to provide their owners with an income in line with this profit. In the worse cases, despite being profitable, the business is unable to pay the bills. This is often the case where businesses are going through a growth period.
The profit is being used to meet the increased demand, this can be buying more product or new materials, improving infrastructure or increasing staff. By the time they reap the rewards investing back into the business it is necessary to reinvest again and the cycle continues.
It is common for a business to have the profits sitting in inventory and debtors. It is important to have at least one eye on the cash flow of the business.
Look after yourself
This seems obvious, but many small business owners fail to look after their own future.
They underpay themselves, ignore their own super and put more and more of their resources into the business.
The idea of being in business is to make money and this should never be forgotten. It is OK to make sacrifices in the short term, with the view to long term success in mind. It is also important to be pragmatic, you need to know when you will receive the benefit of your sacrifices.
We try and encourage clients to put time frames in place where they will be able to pay themselves something close to market rates and nominate a time where they will be in a position to make contributions to super.
Some people are prepared to earn less than they would working for someone else due to the non-financial benefits, things like the extra flexibility.