1. Using the "fly by the seat of your pants" accounting method.
When tax time rolls around there are still some business who find themselves pawing through piles of paper on their desks looking for credit card receipts from business trips. Others are upside down digging under the seat of their cars trying to figure out where all their fuel receipts are. Some are suffering from a vague feeling that someone, somewhere owes them money but, they just can't remember who it is. These businesses are all guilty of operating with the "fly by the seat of your pants" accounting method.
Using this accounting method has a tremendous impact on a business's cash flow. Without a system to track business finances, companies will always be operating in the dark. Perhaps even more significantly these businesses have no way of managing their finances should payments break down.
2. Not knowing what the numbers really mean.
When a business invests the time and effort to implement a truly useful accounting system, that's where the real fun starts. Now they have numbers but in some cases the numbers are all but meaningless to the business managers themselves.
Understanding what the numbers mean is crucial to a businesses' overall cash flow. Are sales trending up or down? Are expenses rising faster than sales? Is one product or service more profitable or better selling than another? How many clients does the business need to meet expenses each month? Can the owners afford to pay themselves this month and if so, how much? The answers all lie in the numbers.
3. Mismanaging Credit: I owe you, you owe me.
There are two ways to mismanage credit in small business:
1. Granting credit without wise credit policies
2. Using credit without any plan as to how to pay the bill.
Both of these scenarios have a huge impact on business cash flow and are often closely related. Here's a scenario to demonstrate this point. A business has two opportunities: the first to work on a big project for a corporate client or the second to take on several small clients. The business might think the big client is the way to go but how long will it take them to get paid? Often, large companies take their time paying-sometimes 60 or 90 days, sometimes longer. In Dun & Bradstreet's Australian Trade Payments Analysis businesses with more than 500 employees were the slowest to pay their bills in the March quarter at 58.9 days, a figure which is more than three days slower than any other group. This also marks the group's 14th consecutive quarter as the slowest paying group. By choosing to work with the big client the business may find that they have tied up a tremendous amount of their time with no cash flow to pay bills. The smaller clients could provide more immediate cash flow without tying up time. Often it is useful to understand the risks associated with business payments before entering any agreement by getting a better understanding of typical payment times though factors such as business size, industry and geographic averages.
It's also easy when times get tough to pull out the credit card to cover current expenses. But doing this with no plan of how the bill gets paid gets many small business owners in hot water fast.
4. Ignoring the relationship between receivables and payables.
In a perfect world business receivables (what customers owe) would be paid just in time for you to pay business payables (what a business owes its vendors). But, if you're a small business owner you know Rule #1 is "Stuff Happens". The customer that a business thought would pay their bill this week, doesn't. So as a result the bills that they thought they could pay this week simply don't get paid.
If what a business owes to others is far more than what is owed to the business, then it has arrived at a critical problem. It's not just the balance that's important, it's the quality as well. If a businesses' receivables are as old as time itself then the chances that they will ever see actual cash are very slim indeed.
5. Focusing on profit instead of cash flow.
Profit is the ultimate goal of every business. Or is it? Many businesses that fail are operating at a profit? For the small business, cash flow is the ultimate goal. No cash flow. No business - end of story!
What's the difference? Mostly the difference is in the decision making process. "If I take on this big job, it will earn me a huge profit, but if I take on five smaller jobs, I'll have cash to pay my bills." Every business wants to be profitable but every decision has to be measured against the effect it will have on cash flow.
6. Forgetting the basic debts.
Some bills are easy to forget. Bills like insurance, payroll taxes, superannuation. They sort of sit out there, almost off the radar screen. They don't have to be paid right away. It's easy to forget them until suddenly they're due and they're due right now. Then, cash flow problems result as businesses can rob Peter to pay Paul. It can take months or even years to recover.
7. Spending the company's future on a speed boat.
Everybody is guilty at some point in their lives about fantasizing about a little luxury. Haven't you always wanted a speed boat? Or a fancy car? Or an all expense paid trip to Europe? It might be tempting to try to pass your personal purchases off as tax deductible business expenses. But, it's a bad idea for two reasons.
The people who work at the Australian Taxation Office (ATO) are over-worked but they're not stupid. The last thing you need is an audit. An audit could reveal your transgressions and could result in an unexpected tax bill plus penalties and interest.
Here's the other reason it's a bad idea. Small businesses operate close to the edge. Unless any business has a reserve to see them through the tough times, then they are always in danger of being on the wrong side of that edge. To succeed business need to take care of the goose that lays the golden eggs first. Then, the managers can pay themselves a properly taxed bonus and buy all the toys they want.
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