In this blog I’m going to tell you the 5 main mistakes business owners make when managing the money, and what you should do to avoid making them.
(In fact, there’s more than that, so I’ll cover the rest next time).
If you ask a random sample of small business owners what the main challenges they face in running the business are, I guarantee that three issues will crop up time and again:
How to grow sales.
How to grow profits (not the same as sales – see my earlier blogs).
Managing the money.
All the exciting growth strategies in the world won’t help when the bank account is empty, so let’s look at money management.
1. Spending Too Much Too Soon
Many new business owners overspend, buying more stuff than the business can sustain.
This means starting with more borrowing and expense before the business has a chance to prove itself.
Start small to make sure the business will work, and scale only when necessary and sustainable.
2. Overestimating Future Sales
You need to know what you’ll receive in order to know what you can spend.
Be positive, but you also need to be realistic with your sales projections.
Make it more scientific – work out your cost per customer acquired.
A formula you can follow is this: X money spent on generating leads divided by sales made.
If you spend £5,000 on marketing and acquired 100 customers, the cost per customer acquired is £50.
If the formula holds true, you can better estimate your future sales by saying, “If I spend X more, I should get Y more customers.”
Not fool proof, but it’s better then sticking your finger in the air.
3. Mixing Business and Personal Money
As well as making accountants cry, failing to keep your business and personal finances separate makes it hard to figure out exactly what is happening in the business.
Keep them separate. Setting boundaries forces you to view you and your business as separate entities which gives you a more accurate read on your business’s financial health.
4. Confusing Profit With Cash
Yes, it’s my old favourite but it’s massively important.
Cash and profit are different beasts – confusing them will paint an inaccurate picture of your business finances.
This can lead to overinvestment in certain areas, while being unable to cover everyday overheads.
Cash is the amount of money your business has readily available at any given time.
Profit is what’s left after covering all necessary expenses.
When in doubt, play it safe and keep in mind this basic calculation: Cash Now – Expenses Due = Profit.
5. Operating Without a Budget
If you pay any attention to the business news, you will know that certainty and stability are what big businesses like.
But in the world of small business, many business owners take more of a “fly by the seat of the pants” approach to money management.
Without a clear understanding of when and how money is coming in and going out you may end up making a wrong turn into a financial pitfall.
A budget is the best tool for understanding the destination of every pound.
Drill down and work out, for every pound you make, where every penny is going.
Work out in advance what needs to be set aside for suppliers, savings and taxes. A clear budget will help you understand your profits.
Ok, that’s five major areas to think about – won’t all be relevant to you, but I bet some are. I’ll look at some more next time.
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Chris Martin is a chartered accountant and business advisor and has been helping franchisees create and grow wonderful businesses for over 20 years. He is a published author and has written extensively on franchisee tax issues. He passionately believes that whilst franchising is a deservedly successful business format, franchisees are often let down by their franchisors’ failure to offer support and guidance regarding the financial side of running the business. This leaves franchisees frustrated, overwhelmed and unable to grow their businesses to the extent they should. Chris has developed simple systems, support and guidance to ensure franchisees create businesses that provide them and their families the lives they so richly deserve.