GENERAL

4 Financial Mistakes to Avoid (and What to Do Instead)

3 Oct 2018

So, you found a problem that you can create a business solution for, you raised capital, hired a great team (or going at it by yourself) and your SME is running smoothly. While you may have gone past some of the biggest obstacles to your business, a few simple accounting and bookkeeping errors might bring all your hard work crashing down.


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If you are like most SME owners, bookkeeping and accounting may not be your primary strengths. And this becomes even more difficult when you are running a business on your own. Many times, you choose to do these processes by yourself. After checking with some experts, here are the most common financial mistakes to avoid when managing your business.

1. Mixing business and personal finance

Spending money meant for your business on personal needs or spending personal money on your business (without a budget or clear plan) will end up creating more challenges for you personally and for your business, especially since you probably did not budget for personal expenses in your business plan. It also makes it difficult to settle your balances between business and personal transactions.

What you should do instead

Open a separate business account. This is particularly important if you are in a partnership business where someone other than yourself needs access to the financial details and account.

2. Spending too much on start-up costs

Unless you have created a strict business plan for how you will spend the capital you raised for your business and stick to the budget, you are likely going to overspend on start-up costs. This happens because it is only natural to be optimistic about how fast your business will be bringing in customers and the profit that you will be making. And before you know it, you are overspending on hiring, marketing, inventory and equipment.

What you should do instead

Create a realistic start-up budget based on real-life costs and facts. Research other businesses like yours. Find out how long it took for them to get profitable, how much inventory they needed, how much they spent on marketing (if any) and what equipment they bought. Being part of an SME community can help make it easier to find other entrepreneurs who have experience in these areas. Case in point: an entrepreneurship event like SME BizConnect held recently creates a wonderful opportunity for you to gain valuable insights from industry experts and fellow SMEs alike.

3. Not having a financial safety net

Overspending your start-up capital is one problem. Another is not raising enough to have cash reserves in the first few months or even years of running your business. Cash flow in this period is going to have its ups and downs. The last thing you need is to run out of operating money before your business even takes off.

What you should do instead

Create a start-up budget with allowance for at least six months of operating costs. This gives you enough space to get through rough times in running your business and to at least have time to turn things around for good. This also allows you to handle financial emergencies if they occur.

4. Not reconciling your accounts

This means not checking to confirm that your cash flows and account balance are correct to ensure accurate accounting records. Not doing this weekly or monthly will result in errors and financial irregularities which become obvious when it is time to submit your tax returns.

What you should do instead

Simply keep accurate records of your business cash flow like equipment purchases, travel expenses, wage payments and overheads. It helps you see if and when you are overspending in any areas, and understand whether you will make a profit or loss.

If you would rather not be in charge of accounting and bookkeeping, it may be more financially reasonable to hire a professional accountant who will manage that aspect of your business. Nevertheless, it is still important that you understand how the finances flow in and out of your business whether you retain an accountant or not.

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