I’ve compiled a list of some top financial mistakes that small business owners make that I have found through some research. Many business owners do these without even realizing it. I want to take some time and shed some light on these topics and help provide some guidance.
I’ll start by giving the list and then going a bit more in depth on each topic.
Having sloppy, tardy, or inaccurate financial statements
Lack of understanding of what the financial statements are saying
Not paying attention (Ostrich syndrome)
Use of cash basis to report
Making decisions based on tax implications only
Not using budgets, benchmarking, or forecasting
Over-reliance on debt
Ineffectiveness; trying to do too much (getting away from core business)
Inefficiency due to lack of (or poor) systems
Poor advisory team
1. Having sloppy, tardy, or inaccurate financial statements
Do you look at your balance sheets, income statement, statement of cash flows or any other financial report and can’t make any sense of the numbers? Even worse is having no statements at all!
These reports answer common questions like how the business is doing, what the business owns, what it owes, who owes your business, what profit there is, and how the cash flow is doing.
How do you know that those numbers are accurate? Or do you just look at the bottom line to see what your profit is? You can’t make sound financial decisions with inaccurate (or no) financial statements.
Lutz Bookkeeping Solutions can help! We have monthly consultations with our clients to review the statements and go over those numbers.
2. Lack of understanding of what the financial statements are saying
This falls in line with the first point. Financial statements take a look at the history or what has happened up to a point in time. These are things that have happened, you can’t change it.
What my business does is take these statements, through interpretation, and advice, and analysis and inform my clients. The goal is to educate the clients over time. This isn’t something that is learned over night.
3. Not paying attention (Ostrich syndrome)
What I mean by not paying attention, or “sticking your head in the sand,” is saying to yourself, "Hey, as long as I sell stuff here in my business, as long as I do the service or sell the product, everything is fine. I don't need to pay attention to those pesky financial statements." Not true! Bookkeeping is the language of business.
You want to be able to look at the numbers and see where you are spending too much, areas you can save money, etc. Working with a bookkeeper consistently, and one who understands what is happening in your company, is invaluable to you.
4. Use of cash basis to report
Did you know that there are multiple ways to look at your financial statements?
The most common, and is standard practice for GAAP (Generally Accepted Accounting Principles) is the accrual basis. The cash basis does not show you the whole financial picture; it only reports cash as it is received.
If you have accounts receivable and/or accounts payable, you need to make sure that you are reporting correctly. There are businesses out there with no receivables or payables out there, and working in the cash basis is fine for them, but most businesses have some form of accounts receivable or payable. So you should be viewing your reports in the accrual basis.
5. Making decisions based on tax implications only
Let me tell you a little story I heard from one of my teachers:
Every December, toward the end of the month, I would get people calling me left and right going,
"Hey, I'm here at the car lot, and I'm thinking about buying this new $60,000 truck because I'm going to save on my taxes."
I'd be like, "All right, let me ask you this. Do you need that truck?"
"No, my other one's running fine. But I need to save on taxes."
I'm like, "Okay, let's think about this. Let's say that you save 40% on taxes. Let's just say. So that means you save $24,000 by buying that truck. 60 grand times 40%, 24,000 tax savings. So that means, higher math says 60,000 minus 24,000 means that you're still out $36,000. Is that truck going to make you any additional money?"
"No, but it's going to save me on taxes."
"Well it's going to help you to lose $36,000."
-Ben Robinson, CPA, Bookkeeper Business Launch
Long story short, just because something may have tax-saving implications, it doesn’t mean it is the smartest decision for you and your business.
6. Not using budgets, benchmarking, or forecasting
This is very important for many businesses. Not just for using them or just setting them up, but monitoring them, and making adjustments based upon them.
Budgeting helps you as a business stay on top of where money is being spent. It takes a look over a period of time to see how you are doing.
Benchmarking is taking a budget to the next level. Basically, this will show you how you are spending against the industry average. Maybe you are doing better than others, maybe you are spending well over what others do. You want to look into why that is.
Forecasting is looking into the future. You use historical data to make informed estimates that will help to determine the direction of future trends.
Use them as a strategic tool to get what you want. To achieve the financial goals that you have in your business.
Do you have any of these in place? Do you look at it? If you don’t, I recommend getting one in place so you can see where that money is going!
7. Over-reliance on debt
Seems pretty basic, right? The real reason that people have to rely on debt is that they don't have the cash. If your debt is greater than your profit, it may be indicative of other things.
Maybe the business owner is taking out too much money, or there is too much money tied up in staff/payroll, or there is just, plain and simple, too little gross profit. You want to try and avoid as much debt as possible!
Having too much debt and not enough income, can result in the business shutting down. Easy solution, don’t spend what you don’t have (as much as you can avoid).
8. Ineffectiveness; trying to do too much (getting away from core business)
If you are being effective, most likely you are doing right thing. There are businesses that are successful and instead of doubling down on what they're successful on, they go over to some shiny object.
It doesn't mean that you shouldn't chase other things, but it should mean that you get all that you can out of all that you have.
Focus on what you are doing right and how that is helping making money, don’t stray away from it.
9. Inefficiency due to lack of (or poor) systems
Efficiency is doing the right thing and doing it well. So this is due to a lack, poor, or having no systems. You need to have those systems. Technology is constantly changing and making business like easier. There is pretty much a system for everything.
In regards to bookkeeping, there are systems that deals with money, budgeting, forecasting, bill pay, those things.
You want to work smarter, not harder. Using these systems can help you save time so you can focus on your business and go back to making more money.
10. Poor advisory team
Finally, having a poor advisory team. These would be professionals such as a bookkeeper, CPA, tax pro, commercial banker, insurance agent, business attorney, etc.
Most business owners want to save money. Unfortunately, this is not an area in which you want to save money. You want value. You want trusted advisors to help make solid business and financial decisions.
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Thank you,
Gary
