When you’re in business, you’re often trying to find the most effective ways to establish your venture and make it successful. But although it’s exhilarating to piece together the building blocks of your business, it’s also easy to slip up along the way.
Here are just a few of the most common mistakes that small businesses and start-ups make when it comes to their finances, and some advice about how they can avoid falling into the traps.
1) Not spending wisely
All businesses need to incur expenses, but it’s important to review all of the options instead of rushing into a hasty decision. Many small businesses often either spend too little on their infrastructure because they’re worried about keeping their costs low – or end up paying more than they can afford, because they feel this is the way to compete with other businesses in their sector.
Of course, the danger of choosing a low price option is that it can potentially reflect badly on your business and could make you look cheap and unprofessional to customers compared to your competitors. But it’s also unwise to go to the other extreme and pay top-of-the-line prices unless you’re 100% certain your business can afford to do so – otherwise you’re likely to face financial problems down the line.
For example, you may think those state-of-the-art business cards are essential, but are there more reasonably priced options that look just as good? Instead of paying £2000 for a new flat screen computer monitor, is anyone selling a high quality used one? Remember, you could be putting the money you save to better use elsewhere in your business, so it pays to shop smart.
2) Not charging your customers enough
When you’re running a small business – especially in the early stages of trading – it’s very easy to set your prices too low. You may feel you need to charge a lower price than your competitors in order to get a foothold in your target market and to attract customers away from more established competitors. That’s all well and good, but don’t undervalue yourself – there’s no point in setting a price that’s unsustainable, as you’ll either end up losing money or not being able to grow your business.
Focus on highlighting the things that make you different from your competitors and the high quality of service that you offer, rather than just focusing on setting the lowest price. Remember that many customers will pay a reasonable amount for a high quality service – they’re not always looking for the cheapest option.
Make sure that you charge what your service or product is worth – and think of the time and energy you’re saving your customers, as well as what they’d pay to a competitor.
3) Not collecting your cash fast enough
Too many small business owners are too nice to customers in this area. You’ve done the work so it’s important to make sure you get the cash – because without enough money coming in to pay your bills, your business can’t survive.
Make sure you’re invoicing properly for the work you do and chase up these invoices with your clients to make sure they pay you on time. Set your payment terms and make sure your customers know when they have to pay you – then keep to them! You may even want to consider using invoicing software to send out email reminders for you
You may want to give your customers more time to pay if they’re in genuine difficulty, but don’t be fooled by the same hard luck stories every time!
4) Wasting time
If you’re running your own business, you have a lot of different things to manage – and they all have a big drain on your time. You’ve got to market and advertise your services, balance the books, chase up your invoices, network for business leads and plan your sales strategy – and that’s before you actually do the work that you charge your customers for!
Many business owners want to do everything themselves in order to feel in full control of their ventures – but without the right tools, this can be a Herculean task. So look at whether there is any suitable technology available that can help you avoid wasting time on the admin.
You may already be using resources like Dropbox or Basecamp to help with the overall management of your business, but are you doing the same when it comes to your finances? Using cloud accounting software could dramatically reduce the time and expense of managing your finances – and there are also specific apps to help improve everything from your time tracking and invoicing to your cashflow forecasting.
5) Not keeping records
As obvious as it sounds, you need to remember that cash is the lifeblood of any business. This is never more true than in the business’s early stages. So it’s vitally important for any business to keep clear accurate financial records so what’s happening to the cash can be understood.
But in the early days there are a million and one more interesting and exciting things to take care of as well. So it’s very easy for the finances to take a back-seat.
Of course keeping records and documents for completing tax returns and filing statutory accounts is a legal requirement, and penalties for failing to do so can be stiff.
But equally important is the fact that your business will never get off the ground if you don’t have a realistic model of your finances and a way of tracking actual progress against that.
It doesn’t have to be complicated or sophisticated, just something that you get into the habit of keeping up to date.