According to Forbes, around 20% of small businesses collapse within their first year. The author notes something you’ve probably thought about as well: this number seems quite low. Twenty percent is a small figure in the grand scheme of things, especially when you consider the trials a small business has to go through to succeed. But this figure only tells half the story.
Your first year in business is the setup phase. It’s often when you’re running off financial capital you’ve saved or acquired through investors. It’s only when things start to kick up a notch, and longevity sinks in, that things begin to go awry.
By the five year mark, around 50% of businesses will have fallen apart. The early days are often survivable, but as time ticks by, it becomes harder and harder for you to stay profitable. There are many reasons for this, most of which come down to your specific industry and circumstances, and this article cannot hope to cover them all.
However, it can hope to cover some fundamental mistakes businesses make. Some common problems bleed profitability — and drain it unnecessarily. The small business landscape is blighted by easy-to-avoid financial mistakes that are killing your ability to optimize profit margins. No matter how long you’ve been in business, taking every step you can to stay above water is essential.
So what financial mistakes might you be making?
Failure to Identify Overspending
We don’t have to tell you how busy you are. Small business owners are exceptionally busy people; it’s a known fact of the lifestyle. Weighed down by everything from administration to project management, there are not enough hours in the day for the modern business owner. But this lack of availability has a wide-reaching impact on your profitability than you might believe. While you are focusing on building your business and building those profits, you are probably losing money because important, yet non-intrusive tasks are falling through the cracks. Why do we mean by this?
As a business owner, the big things often grab your attention — deadlines that need to be met, clients who want answers, orders that must be delivered. When all this is happening, there are little things you just don’t see, but these little things are costing you money.
Many businesses have financial agreements with a host of different entities. These could be loans from banks, suppliers of resources or even just rent bills. You’ll probably pay these monthly or annually. They’re established and sorted, so it’s easy just to let them run their course. However, as time rolls by, you may find you are overpaying on these expenses.
For example, the transference of credit to a different provider may see lower interest rates, or you may be about to source supplies from a cheaper seller. Ignoring these outgoings is very easy because ignoring them doesn’t stop your business operating, as it would with some other tasks. However, by not paying attention to your expenses, you could be dramatically overpaying on items you don’t need, driving up your costs and ruining your profit margins.
Failure to Maintain the Books
What is bookkeeping? In short, bookkeeping is an essential business practice that involves the recording of all financial items — both expenses and revenue. The problem is, this is a crucial business practice that many businesses don’t carry out.
Otherwise known as “the books”, bookkeeping is effectively the overview of your business’s financial health. The books should contain all financial data, allowing you to see clearly what the monetary situation of your business is. Accurate books enable you to make decisions based on your business’s financial circumstances and prepare for problems.
Unfortunately, it’s a time-consuming task and one that can require a bit of financial know-how, which means it can often get left behind. When your books aren’t accurate or maintained, you can make bad calls on spending, or perceive your financial health to be better than it is, resulting in potentially catastrophic issues and loss of profits.
There is a trick many business owners use to ensure their books are accurate, however. Simply assigning a timeslot of a few minutes every day, or a chunk of time every week, to reconciling expenses and revenue with your books ensures accuracy and awareness. Bookkeeping software can be beneficial for streamlining this task and making it easier to manage, so it is also worth considering.
Failure to Take Advantage of Tax Breaks
Tax breaks exist to support businesses. From operational deductions to resource expense claims, there are plenty of ways your small business can save on its tax bill. But the government isn’t going to put in the legwork for you; you must do it yourself.
There are many tax breaks that small business owners often overlook, which means higher than necessary outgoings and a decline in profitability. The solution to this problem is straightforward to achieve. All you have to do is understand what tax breaks apply to your business and take advantage of them to save money.
So how do you do that? You can do one of two things:
- You can do the research. You can look around online at available tax breaks and see if they apply to you, as well as discussing tax breaks in your industry with those in your network. Or;
- You can go the easy route and hire a financial expert to look into your business and explain the options available to you.
Either way works; either option saves you on tax long term.
Failure to Outline a Proper Budget
Budgets are a lifeline in business. They keep you grounded and your goals realistic. They stop you from going overboard and sinking the ship before it’s even left the harbor. But you cannot rely on this lifeline if you don’t develop budgets properly.
Many small businesses will set an outline budget, but often this is an arbitrary figure. Budgets routinely lack evidence-based arguments for existence and are instead laid out within an idea that is considered reasonable or sounds about right. Budgets basically become rough guides, instead of what they should be: restrictions to live and work by.
The result is, many SMEs will end up overspending.
The solution is simple: official budgeting documentation and strategy. At the beginning of the business year, look at the money available and predicted income, and align your finances with your budgets. Know what you are capable of spending, and then outline rules to enforce your budget. Budgets don’t have to be set in stone; they can be adjusted as the year unfolds, either to match increases in profits or decreases. However, they should be monitored and abided by, and created using evidence obtained from records of your current financial situation. This is where accurate books can be incredibly beneficial.
Guesswork, what-ifs and wishful thinking don’t help you to produce a budget that keeps you profitable. Sadly, realism is the winner here.