The financial success of an SME is largely determined by its ability to generate income, pay expenses and mitigate risks. This formula seems simple on the surface but many SMEs can run into difficulty with their business financing, simply because they take their eye off the ball or overestimate their profit.
As a business owner, you need to be vigilant on a daily basis to ensure all your operations are running smoothly and you’re making a true profit. And like most SMEs, you probably can’t afford to make financial mistakes.
Here are the top 4 mistakes that are all too common, and easily avoided, when it comes to SME business finance.
1. Not reviewing your accounts
Make sure you reconcile your bank account and produce a profit and loss statement at least once per month. A profit and loss statement is a key metric for SME business finance as it provides a snapshot of how your business is performing.
If the numbers are moving in the wrong direction you can instigate a course change quickly, rather than six months down the track when it might be too late to rectify the issue.
2. Not keeping track of your costs (keeping track of the ROI)
Tracking costs creates financial awareness so you know exactly where your money is going and you can identify areas where you’re spending too much. Keeping track of costs also allows you to clearly see your return on investment (ROI) to ensure you are actually profitable in every product you sell or service you provide.
3. No contingency plan
Running an SME is a risky venture, and business owners should always be prepared if something terrible were to happen. A major cause of business failure is not putting in place a risk management strategy or having emergency funding up your sleeve, whether a bank credit facility or equity.
A contingency plan allows you to record potential problems, assess their seriousness and how much they’ll cost to fix. A thorough risk management strategy allows your business to prepare for worst case scenarios and recover quickly after interruptions.
4. Prioritising profit
One of the main reasons SMEs fail is due to trying to expand or diversify prematurely. This is because business owners have confused cash flow for profit. Cash flow is king but don’t lose sight of your true profit. Don’t use ‘add backs’ (i.e. depreciation, owners wages and ‘one off costs’) to justify your lack of true profit, it’s tantamount to sticking your head in the sand. If your business isn’t making a sound net profit before tax (after all legitimate cash and non-cash expenses) then you need to challenge your entire business existence!
If your profits are negligible, look at your gross profit and net profit margins. Understand your true business operating costs, determine what is a reasonable profit that your business should make in light of all the risk, stress and strain that you take, and then work backwards from there to determine what you should be charging your customers for your products or service.
Consider cash flow lending as a solution if you’ve run into temporary difficulty. This provides a flexible facility to inject cash into the business to meet timing differences in payments and receipts.
By avoiding these common mistakes and paying attention to the details you’ll be in a much stronger position to maintain a healthy bottom line, and ultimately, protect your business’s future.