Many things can spell trouble for businesses. Sometimes it can be a lack of customer interest. At other times it could come down to a bad advertising campaign. However, the biggest cause of business failure is poor finance management. Often it is the simple mistakes that have the most devastating impact. Therefore, it is worthwhile to know exactly what you should avoid. Here is just a short list of oversights that could lead to major, irrevocable issues.
Having no finance skills
Many entrepreneurs lack a solid grounding in finance, which often leads to a misunderstanding of what it actually entails. “Finance is often seen as two ends of the spectrum; bookkeeping is regarded as an admin task for lower level staff who lack the level of understanding to deal with the complicated stuff that is best left to the accountant at year end,” says Serena Humphrey, founder and MD of The F Word, the financial consultancy. “This conspires to create a true black hole of finance skills in many small companies.”
With five-year business survival rates barely at 40%, Humphrey believes a lack of financial skills could be partly to blame. “Any business I’ve seen get beyond that five-year mark has had a wake-up call and made sure they have proper finance skills in place.” “One vital thing they should understand is that anyone left to look after their money needs to be a suitably experienced and qualified bookkeeper,” she adds.
Using VAT and corporation tax as working capital
This is something that many small businesses do, often with disastrous consequences. The problem is that most businesses see their VAT and corporation tax as something to be paid once a quarter or once a year, and in the intermitting period see it as part of their cashflow.
“VAT is something you add to your sales and purchases although the net VAT which you pay at the end of the quarter is not your money,” says Humphrey. “Where most businesses go wrong is keeping this in their day-to-day cashflow, which can make them feel like they have more cash than they do.” The only way to manage your VAT is to put it away in a separate bank account as often as possible; monthly at the least, and weekly ideally.
As for corporation tax, it would be a mistake to keep that extra cash in your account, which inevitably gets used up in cashflow. “Unsurprisingly when the annual tax bill is due, there isn’t enough cash to pay it,” she says.
Not having a long-term plan
For so many small business owners, planning anything beyond the short-term is a chore. This is not the ideal approach “You need short, medium and long-term plans with contingencies built in,” says David Banfield, president of IFG, the funding provider. “The art of running a business is not just about delivering a product or service; it is a holistic approach where every aspect of the operation must be understood and planned accordingly.”
Establishing a clear financial plan from day one will help to keep your finances on track and ensure that your money is spent in the areas of your business that boost profits and give you the best return on your investments. Detailing your business’s sources of income and expenditure can tell you a lot about the financial health of your company, particularly when it comes to comparing forecasted figures against actual results. More importantly, developing and maintaining a budget helps you identify periods where cash flow may be restricted.
“Looking at things with an even longer term view, your financial plan acts as a roadmap for the continual growth and development of your company,” says Banfield.
Assuming your customers will pay on time
The majority of small businesses assume that new customers can pay and will pay on the terms they agree. Sadly, this is rarely the case. Research last year by the Asset Based Finance Association (ABFA) revealed that that businesses with a turnover under £1m have to wait an average of 71 days to receive payment. “Just because a company is a major household name, it is no indication of their ability to pay,” says Martin Campbell, MD of Ormsby Street, which helps small businesses make decisions based on big data. “Some companies insist on long payment terms and then don’t even stick to those terms, and such late payment can lead to serious cashflow problems for many small businesses.”
The best way to address this is by checking the financial status of every trading partner or supplier before working with them. “This can be done via Companies House, or also by using a free and simple tool such as CreditHQ,” he says. “This gives a strong indication of a company’s ability and likelihood to pay your invoices on time.”
Small businesses should also talk to other companies that trade with big companies or have done so, to see what their experience has been. Talking candidly about payment terms early in the contracting process is important in getting across the message that you won’t stand for late payment, as is the issuing of invoices ahead of time.
Relying on spreadsheets
Many small business owners rely on spreadsheets to do their books. However, research shows that this often leaves them stuck in a cycle of spending hours each month getting annoyed and frustrated, trawling through reams of paper-based records. “Businesses waste a week per year dealing with spreadsheet issues such as understanding formulas, getting the numbers to add up and keeping version control,” says Rich Preece, VP and country manager of Intuit UK, the cloud accounting company.
To address this challenge, many forward-thinking SMEs are starting to use cloud-based financial management software. In fact, the International Data Association believes that half of small businesses will be using cloud accounting by 2016. “Getting a complete overview of the company finances at the touch of a button enables them to make better informed business decisions very quickly,” says Preece. “For example, they might look back at their last quarter and decide it’s time to pay their staff a bonus or invest in a new technology solution.”