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Avoiding 3 common financial mistakes business owners make

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Friday January 13, 2012 at 1:21pm

With Christmas out of the way and as we rapidly approach the end of the tax year it’s a good time for every small business owner to take a look at their financial management and accounting practices. Small business owners often make seemingly simple accounting mistakes which at their most extreme could mean the difference between a good and bad fiscal year.

Here are three common financial mistakes we encounter and how to avoid them.

Not discussing costs and payment terms in advance.
Counting the chickens before they are hatched is a common issue and is especially problematic at the end of a financial year when you’re considering what profits have been made and planning ahead for the new year.

Sales forecasts and orders are great, but don’t count this as revenue until the service has been delivered. Likewise don’t assume that because you have done the work your customer will see it like this.

How to avoid: Firstly by being clear about when a sale is complete and making allowance for future costs associated with completion.

Secondly by protecting yourself by having proper contracts and terms and conditions in place that can be enforced if customers don’t pay.

And thirdly by having effective credit control procedures, to make sure sales are turned into cash as quickly as possible.

A good way of dealing with these problems is to discuss budget or estimated costs in advance along with the scope of your work and payment terms. Contrary to common perceptions, it is remarkably easy to use Direct Debit to collect payment from customers. This has many advantages, even ignoring the obvious cash flow benefits. It means your customer must take you seriously when you deliver your invoice as they have already agreed to payment leaving their bank account shortly afterwards. This puts the onus on them to stop payment rather than you having to chase for payment.

It also means you have to talk about the important but difficult topics of budget, costs and payment before you have done any work. A customer that does not or cannot pay is NOT a customer.

Failing to consider the financial ramifications of a large purchase
If you need to buy a new server, piece of machinery or other equipment for your business, timing and how you pay are very important. Whether you pay cash, buy on finance or delay payment to a new financial year will have significant impact not only on cash-flow but also on your tax liabilities come the year-end.

How to avoid: When making a major purchase consider a short-term loan if purchasing with cash would put a serious dent in your reserves. Using a credit card is an option for items you know you can pay off in a few months, but beware of high interest rates. Leasing is also an alternative especially useful if the equipment you're considering requires periodic updates or you need to use an item only temporarily.

Failure to keep an eye on cash and cash flow
The challenges small business owners face on a day to day basis often means some spend all their time worrying about immediate concerns, for example how much they have in the bank today, rather than looking ahead to see whether they can afford to pay suppliers tomorrow. Others are so busy working in their business they don’t even have time to keep a check on the current cash position, only being alerted to cash problems when the bank contacts them about being overdrawn.

Getting to grips with the financial management of a business can be a challenge, but is essential.

How to avoid: Put in some simple management systems and reports to track expenditure. Produce a budget for your business, with forecasts of what you expect to generate in terms of sales and how much you expect to spend. Translate this into a month by month cash flow forecast so that you can see any months when you are likely to be close to your overdraft limit or look to be cash rich. With these tools and a set of simple business KPIs you can take control of the financial management of your business. Alternatively you can outsource all of this work to your accountants. We use Xero accounts for this purpose to great acclaim from clients.

2012 could be a tough year for some businesses but getting hold of the financial management of your business will certainly put you in a strong position to face any challenges customers, the markets or suppliers might throw at you.

Andy Parker
Chartered Accountant, Birmingham

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Parker Chartered Accountants and Financial Advisors is the trading name for PLW Advisors Ltd (Registered No. 10396831), and Parker Financial Planning LLP (Registered No. OC347027). Parker Financial Planning LLP is authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales – registered office contact details here