Seven Financial Mistakes Small Businesses Make

Did you know that over 80% of all businesses in the UK ultimately FAIL? In many of these cases, it is not because the business owners aren't passionate about what they do or good at the doing part of their business. The missing ingredient is "profit numeracy". They are not on top of their numbers and they don't truly understand profit.

So let's look at the seven common mistakes that many businesses make when it comes to managing the financial side of their business, which in many cases may result in that business failing.

Mistake #1: Failing to factor in fixed costs when pricing

When deciding on pricing, many business owners make the mistake of only focusing on the gross profit margin, and tend to forget about allocating something for their overheads or fixed costs.

Mistake #2: Thinking that as long as money is flowing into the business bank account, you are making money

Just because money is flowing into the business bank account doesn't necessarily mean that a profit is being made on it. Many businesses fail to look at all the factors when agreeing to do work at a given price level.

Mistake #3: Thinking it is job done once your client has been invoiced

It is not the end of the story when an invoice is sent to a client for payment. A business must ensure that the payment is collected in accordance with its payment terms.

Mistake #4: Not paying close enough attention to cash flow

In business, cash is king! In some ways, managing cash flow is the most important aspect of running a business. If at any time a business fails to pay an obligation when it is due because of the lack of cash, the business is technically insolvent.

Efficient cash management means more than just preventing bankruptcy. It improves the profitability and reduces the risk to which the business is exposed.

Mistake #5: Not producing and reviewing financial reports regularly

Many business owners I talk to have an ostrich mentality when it comes to the numbers side of their business. They just hope that everything will be fine. I find these situations really alarming because apart from the legal obligations when it comes to record keeping, the business could be at serious risk.

Mistake #6: Not having a budget

A budget is a comprehensive plan that estimates the likely expenditure and income for a business over a specific period, typically on 12-month cycles.

To be successful, budgets should be SMART - which means specific, measurable, achievable, realistic and timed.

Mistake #7: Wasting money unnecessarily

I guarantee that almost every business is wasting money on something unnecessarily, whether it is through paying more than they should be, buying the wrong type of input or buying things that the business doesn't actually need.

Producing regular financial statements and having a handle on the numbers is key to effective cost management.