Unfortunately, many SMEs make common mistakes when it comes to their finances that can have a significant impact on their bottom line. In this blog, we will discuss some of the most common mistakes SMEs make with their finances and provide tips on how to avoid them. We hope this blog helps you as an SME to better understand your finances and make informed decisions about your money.
As a small business owner, it’s important to be aware of the common mistakes that can be made with finances. Without careful planning and a strict budget, mistakes can be made that can significantly impact the success of the business.
So, what are these mistakes?
Not having a budget
Many small business owners neglect to create a detailed budget for their business. Without a budget, it can be difficult for SMEs to properly manage their finances as it is difficult to track expenses and plan for future growth. Additionally, without a budget, an SME may not be able to accurately forecast their financial performance or accurately assess their financial health. This can lead to inefficient use of resources, missed opportunities, and potential financial crises. Research from a study conducted by Taulia, a financial services company, suggests that up to 60% of SMEs fail within the first three years due to inadequate budgeting and cashflow management.
Without a budget, SMEs cannot accurately assess their current financial situation, plan for future growth, or accurately forecast their financial performance. This can lead to inefficient use of resources, missed opportunities, and potential financial crises. It can also lead to overspending, taking on more debt than they can handle, cashflow problems, difficulty in meeting financial obligations, and fines and penalties for not paying taxes on time. To ensure the success of their business, SMEs must create a budget that includes an estimate of current and future income and expenses, and a plan for how to allocate funds for investments, capital expenses, and debt repayment. With a carefully crafted budget, SMEs can track expenses, plan for the future, and properly manage their finances.
Not separating personal and business finances
It is essential to differentiate between personal and business finances in order to guarantee that the accounts of a business are accurately recorded. Separating personal and business finances is a crucial part of any enterprise. When personal and business finances are not separated, a variety of severe financial issues that can harm a business’s financial situation can arise. These issues include difficulty keeping track of and managing business expenses, resulting in inaccurate and incomplete financial records; trouble accurately determining income, leading to inaccurate profit and loss statements; a lack of clarity regarding the legal status of the business, making it challenging to prove that the business is a distinct entity from the owner; and difficulty for the business to obtain funding, as lenders may be unwilling to loan money to a business with finances not separated from the owner’s personal finances.
Not keeping accurate financial records
Accurate bookkeeping is critical for businesses, particularly small ones. Tracking finances allows businesses to make well-informed decisions, as well as avoiding errors. Neglecting to have accurate financial records can be detrimental to a business’s finances, potentially resulting in inaccurate budgeting and forecasting, incorrect financial statements, incorrect tax filings, and incurring fines or penalties from government agencies. Furthermore, it can lead to misinformed decisions and bad cashflow management, both of which can cause severe financial issues.
Not taking advantage of tax deductions
It is essential to be aware of the available tax deductions and to make sure to take full advantage of them. Doing so can greatly reduce taxes and help generate greater profits. Failing to take advantage of deductions can be detrimental to SMEs, as it can result in more taxes than necessary and less money for other investments or activities. Additionally, not utilising deductions can lead to higher tax liabilities further down the line, since the business will not be able to take advantage of deductions they could have qualified for in the past.
Not paying yourself
Many entrepreneurs can overlook taking a salary for themselves, leaving them without the capital to manage unforeseen costs or invest back into the business. Not paying yourself can have severe repercussions for a business’s finances. Without a salary, the owner may not have enough money for their own costs, leading them to take from the company’s money. This can create an imbalance in the company’s budget and could have a detrimental effect on cashflow. Also, if the owner does not receive a salary, they may not be motivated to continue working to grow the business, resulting in a decrease in profits and a decrease in the business’s value.
Not having a plan for growth
It is essential to create a plan for business growth in order to reach maximum potential. Without a plan, it can be difficult to manage costs, allocate resources, and gain an advantage over other companies. Without a growth plan, a business can experience a drop in sales and profits, negatively impacting their finances. A growth plan should include a detailed analysis of the market to identify potential opportunities, clear goals, a budget, a timeline for achieving goals, and strategies for achieving success. Additionally, it should include a risk management strategy to mitigate potential issues. Once the plan has been developed, it should be regularly monitored to measure progress and ensure that goals are being met. Any issues should be addressed quickly and adjustments made as needed. Finally, the plan should be regularly updated to stay current with changes in the marketplace.
Taking out a loan for longer than needed
Having a loan for a longer period than necessary can have negative effects on a company’s finances. This is because the longer the loan duration, the more interest the business will have to pay, which can increase their expenses. Furthermore, if the loan is taken out for a longer time than needed, the business may miss out on other potential investments that could have been made with those extra funds.
Here at Newable, we can also give you advice on how to avoid the common mistakes SMEs make with their finances. We have a team of experienced advisers passionate about helping SMEs by providing fully funded advice. We give a range of external support and can help you to understand how to avoid the common mistakes SMEs make with their finances. Find out more about how Newable can help you to avoid the common mistakes SMEs make with their finances.
About Newable
For over 4 decades, Newable has been supporting thousands of businesses every year through the provision of Money, Advice and Workspace. An employee-owned business with a commitment to creating positive impact in all that we do, our team are on hand to help your business today.
Find out more about how Newable can help you and your business.