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Avoid These Top 5 Financial Problems in Your Small Business

By: SmallBizClub


Avoid These Top 5 Financial Problems

Managing a small business isn’t easy, and the single largest contributor to business failure is financial mismanagement. Making smart financial decisions and being consistent can make a world of difference to your business success.

1. The Terrible Effects of a Vague Business Plan

It’s important to work in your business to keep things running smoothly, but how often do you take an external perspective? Have you taken a good hard look at your business and created a plan? Without a solid business plan, it will be a challenge to effectively manage money. Have clearly defined goals, a realistic estimate of expenses, some kind of cash flow analysis and a plan of action you can adhere to. In the event that you need to acquire funding, you won’t be able to do so if your plan is lackluster. You can also fall into wasteful spending habits that won’t directly influence achieving your goals.

Related Article: Be Prepared: 5 Problems That Businesses Mishandle

2. Forgetting to Invest in Customer Retention

Small businesses often devote large portions of their budget to bringing new customers through the door. This is important when you’re establishing yourself, but what happens to those people after they have transacted with you? Don’t focus all your limited resources luring in new customers. Explore your options for turning current customers into repeat buyers. Look at some kind of incentive for more frequent transactions, and reward increasing levels of expenditure.

3. Fundamental Misunderstandings About Financial Information

You have massive amounts of data available to you about money coming in and going out of your business: what you’re paying your employees, what you’re spending in overheads, and what your net profit is. Everything has a cause and effect relationship. You need to understand all these figures and how they affect each other. Look for patterns like increased trade at particular times of the month or escalating costs in a marketing program over time. Try and understand why. This will allow you to make adjustments in your activity based on your knowledge.

4. Creating Inaccurate Projections

Small businesses rely heavily on their cash flow projections, so accuracy is absolutely vital. At any given moment, you need to know where the path you’re on will lead you for at least the next 3-6 months. Being able to create cash flow projections will allow you to recognize and prevent potential problems, rather than being blindsided by them and having to take recovery measures. You can’t afford to put your business in jeopardy due to a lack of foresight.

5. Not Leaving Yourself Any Wiggle Room

Though it may seem wise to keep a tight budget that accounts for every individual dollar, this can get you in trouble. What happens when you run into an expense you didn’t expect? If you need to switch suppliers, hire more staff, or make office repairs, where is that money going to come from? It’s better to add a little contingency to your budget. You never know when you’ll run into a $5,000 issue you need to resolve, but had no way of planning for. Allocate some of your budget into a contingency fund for peace of mind.

In some ways, successful financial management of a small business is similar to preparing for doomsday! No matter how good you are at managing money, anything can happen at any moment. The economy can fluctuate, a natural disaster could happen, or your personal circumstances could change suddenly. There’s no such thing as being over-prepared. It’s a cliché but it’s true: small business owners never plan to fail, but failure to plan is a much more certain path to business failure. Give yourself every chance of success—get on top of the finance side of your business.

Author: Jayne Blake works as a Communications Manager at Prospa, Australia’s largest online business lender. She is interested in new marketing strategies and leadership trends.

Published: December 2, 2015

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