Common Mistakes Small Business Owners Make
Building and managing a small business involves several challenges and complexities. Careful planning and efficient execution are necessary to ensure that your business thrives. While most entrepreneurs plan the aspects of strategy, marketing, and operation carefully, many are guilty of making the mistake of skimping on the financial aspect of their business.
To avoid making errors that might cost you thousands of dollars or your business, it’s advisable to enlist the services of an experienced accounting and tax consultant to assist you in making informed business decisions.
To help you steer clear of any costly situations when managing a business, Numbers Up LLC has compiled a list of the most common mistakes small business owners make and how you can avoid making them.
1. Failing to put a project model together
Many small business owners fail to plan and put together projection models to make forward-looking decisions. If you can project your outcomes, through a solid financial model, you can make better financial decisions to affect future results and cash flow. Ensuring you have sound financials will provide a foundation to build a projection plan. A reliable model will allow for variable assumptions to project revenues and expenditures, based on your industry knowledge and historical trends. Your projection model should include balance sheet assumptions and ultimately flow through to a cash flow statement.
2. Waiting too long to engage help or hire
Many small business owners are entrepreneurs at heart and feel they can do it all. However, it can steer you away from focusing on the value-added activities that align with the overall mission of the organization. We encourage owners to look at the cost-benefit and investment into engaging resources to help. Adding resources in a financially responsible manner, will bring efficiencies to those operations where the resources are considered experts, and free up time for the owner to focus on growth.
Business owners see opportunities and have the vision to see how those opportunities can help an organization move forward. They pursue those opportunities and are determined they will figure out a way to pay for it. This can create some cash flow management challenges and may bring up needs for additional financing options. Often, poor financial records may contribute to poor financial decisions. You can mitigate these issues by ensuring you have sound financial reporting and accountability in place. Strong internal controls on expenditure authorizations and approvals, along with monthly financial reviews, will help mitigate these issues.
4. Missing investment opportunities
Many business owners miss spending or investment opportunities due to poor financial reporting and analysis. You may feel comfortable having a sizable cash balance on hand. Still, if we were to break down your expenses and review the return of those expenditures, at a line item level, we can better determine where we are getting the best returns on every dollar invested. Then make decisions to allocate more funds in one area versus another, or simply add to the budget and measure again.
5. Not understanding the difference between cash flow and profit
If you have a company that works with receivables, payables, financing, or invests in property or equipment, you need to understand the difference between cash flow and net income. Net income is the profits you generate during the period, but not necessarily all the cash. Some of the current month revenue may be sitting in accounts receivable. On the other side, you may have expenses deducted on the income statement but have not made the cash expenditure. Often, the cash timing between the two accounts is different. Then, you have property and equipment purchases that are capitalized and are not reflected on the income statement, in determining the current month’s net income. Only a small portion is picked up through depreciation. This is where a minimum solid financial package should include a balance sheet, income statement, and cash flow. There you can review high-level financial results for net income and ultimately have a view of the effect on cash flow.
To avoid these and other mistakes, reach out to the experts at Numbers Up LLC. As a leading accounting company in Westerville, OH, we offer top-of-line services to small businesses and help them move their businesses forward. From balancing your books to preparing your taxes to offering business advice, we can fulfill your financial needs with care and professionalism. By opting to work with us, you can reap the benefits of our services to take your business to the next level.