Money Mistakes Small Business Owners Make
Business is all about people. Selling to prospects, creating support networks, and motivating employees are vital to your success. This is the work most business owners enjoy and concentrate on. They figure they can just turn the money matters over to their bookkeeper and CPA and forget about it. Unfortunately, this doesn’t work.
Business is a numbers game that the business owner must become at least reasonably proficient at in order to gain massive profits. These are some of the main mistakes I see.
Not reviewing your numbers at least monthly. I am truly amazed at how many business owners don’t know if they made a profit until I finish their tax return after the year is over. There is literally nothing more important to your success than understanding your critical success numbers and reviewing them regularly. At a bare minimum, it is important to know how much you have in the bank, what your sales are, what products are selling, who is buying, how much you owe, and your profit margin. A regular review allows to you to adjust and correct before a small problem becomes a big headache.
Undercharging for services or products. I have made this mistake more than any other. Very few customers buy solely on price. The ones who do, you probably don’t want as customers. If you have done a good job marketing your Unique Selling Proposition, you should have no trouble increasing your prices. For many businesses this is the difference between barely surviving and raking in massive profits.
Concentrating only on increasing sales. Too many businesses believe that the more sales they make, the more money they make. This is not always true. In fact, I have seen many businesses grow their way right into bankruptcy. Sales are important but the bottom line is all that counts. You should be concentrating on increasing profits.
Not knowing your true product costs. Most businesses know their product costs. But few really know their ABC’s. This stands for Activity-Based Costing. It is the total cost of preparing a proposal or bid, getting a sale, delivering the product or service, collecting the receivable, and completing any required warranty or follow-up work. I have worked with many clients who never even knew that they were losing money on a sale. Some were ignoring extremely profitable product lines.
Not having a cash budget. Cash is KING! More businesses fail due to cash crunches than due to a lack of customers or profits. A properly prepared cash budget can warn you months in advance of an impending cash crunch. This early warning allows you to plan and look for ways to minimize it.
Extending credit too easily. Too many business owners sell on credit without doing a credit check. If you’re not going to check credit, at least get a down payment from all new customers. My experience is that those who aren’t going to pay later won’t be willing to pay now.
Not selling on credit or making it too difficult to get credit. Once burned, many business owners make it too hard for future customers to obtain credit. This leads to a decrease in sales and missed opportunities. When I was the CFO at the local Coca-Cola bottling company, we gave every new business credit. Many of them couldn’t get any credit because they were so new and hadn’t established a good history. Of course, we kept a close eye on these businesses and cut them off at the first sign of trouble. But this led to many very loyal customers who never, ever considered switching to our competitors, because we had given them the chance to prove themselves.
Not staying on top of receivables. There is no real secret to keeping receivables under control. All it takes is a regular review of your aging report and staying in contact with the customers who owe you. It is true, the squeaky wheel gets the grease. The vendor who calls the most usually gets paid.
Not taking income tax planning seriously. Income taxes are like any other expense. When managed properly they can be controlled and even reduced. Many business owners leave this for their tax preparer, many of whom don’t do tax planning at all. Every year I work closely with business owners to save them tens of thousands of dollars in taxes. If your tax preparer is not swamped in November and December, they are probably not doing tax planning. Find one who is.
Falling behind on payroll taxes. This is by far the biggest reason that business owners end up in bankruptcy. This is also one of the few items that the owner is personally liable for, even if they are incorporated. If you can’t pay your payroll taxes, you have a serious underlying business problem that you must solve immediately.
Having only a few customers. Time and time again I have watched successful businesses fail because their top customer leaves them. When times are good, you should be out to get the next big customer. Most business owners don’t even think about attracting the next dream customer until they are desperate.
Not outsourcing their bookkeeping. I’m a CPA and I don’t do my own bookkeeping. Yes, I am lucky that my wife has an accounting degree and is probably better at it then I am. But even if I didn’t have her, I wouldn’t do it myself. It is simply a poor use of my time as the owner. The owner’s time should be focused on increasing sales and profits.
Not signing all of your checks. Once you hire an assistant or bookkeeper, it is very tempting to let them sign checks for you. Don’t do it! Signing the checks, no matter how large your business gets, is a crucial step towards reducing fraud and excessive spending.
Letting your bookkeeper reconcile your bank accounts. Google “bookkeeper fraud”. Many small business owners lose money to bookkeeper fraud because they give up this basic level of control. If you aren’t going to reconcile them yourself, get your CPA to do it for you. Trust me, it will cost less than the amount you could lose to fraud.
Not backing up your computer files. Many businesses have gone out of business because their computer systems went down. I highly recommend using an off-site internet-based solution.
Using the wrong entity for your business. Meet with a business tax expert soon to ensure that you are running your business in the correct entity. I saw a bad choice cost one partnership about $45,000 per year in extra income taxes. Assuming they stayed in business for 10 years, that’s $450,000 that could have been used more productively.
Overspending. Lots of business owners feel they need to have the best of everything. My rule is that if it doesn’t have a direct effect on the customers’ experience, it simply doesn’t matter. Get whatever does the job without breaking the bank. Use a budget and plan your spending in advance to make sure you don’t overspend.
Underspending. Other business owners refuse to spend money on marketing, education, technology, and training. This often restricts their growth and they fall behind their competitors, because they understand that these are investments in future growth and success.
Not being a lifetime learner. Our world is changing constantly, and your business needs to change with it to grow and prosper. I have reinvented my CPA firm at least four times since I started. This has allowed me to keep growing while many of my competitors have stagnated or gone out of business.