Managing money does not come naturally to people. Even those who went to business school may commit errors in financial planning. This is especially true for startup founders, who have to wear many hats to keep the company afloat, and must direct their attention to various matters.
Owners learn how to plan for spending through years of studying people’s reactions to events. Because industries are made of people, money management is something you will master through interactions with contractors, partners, customers, employees, and other people involved in the success of your company.
When you do make a mistake, though, remember that a single financial blunder will not spell the downfall of your business. You can use these mistakes to learn how to build better systems and prevent similar issues from happening. Here are a few common mistakes planners make, and what to do to prevent them.
Poor accounting - hire a specialist or get a service
When your business is up and running, one of the first things you need to figure out is the accurate tracking of income and expenses. If your accounting is not accurate, you will not know how much your activities truly cost.
This means you can overestimate your cash flow, and get into contracts or projects that your funds cannot back. Errors in accounting could even result in legal trouble since there could be discrepancies in your tax filings or income reports.
If you are not a detailed, numbers-oriented person, it will be easy to fall into this trap. Startups might not have the capital to get a full-time, in-house financial officer. In this case, you should consider hiring a small business accountant or outsourcing your bookkeeping.
Undercapitalisation - master project estimates
At the heart of operations is making capital move. For startups, and even some businesses that have been around for a while, cash flow can be a struggle. This is especially true if you have clients with high billables who cannot pay on time. In cases like these, when income relies on a handful of top partners, you might find yourself scrambling to meet monthly expenses.
Be conservative in project estimates; always assume that any plan you begin will cost twice, or even thrice than what you thought it could. However, you should avoid pessimistic estimates, which result in being unduly tightfisted about funds.
Your cash flow problems will also be eased if you have a diverse enough clientele. Getting clients even before your contract ends with your current ones will help you catch financial shortfalls before they happen. Aside from getting projects in the pipeline, consider implementing intermittent invoicing with your current clients.
Excessive overhead costs - slow down expansion
Growth is good for any company; when done properly, it will generate more revenue and make your business more stable. However, if you expand too early, you might increase your operating costs and dilute your cash flow.
Upgrade your hardware, hire new workers, or move into bigger offices when you are sure that your cash flow won’t take a hit. Expanding when you have a reserve of funds is also a good option, as this means you’re separating your expenses from the costs of growing your business.
Poor cash flow - issues with pricing
You might be doing all of these but are still suffering from poor cash flow. In this case, you can check your pricing models and see if there’s something that needs to be improved. It’s always better to sell more units at higher prices than to move more products at a lower price.
At a high price point, you enhance your brand and protect your margins. Your company should be differentiated in a way that does not involve offering low prices compared to competitors. Hire an online accounting firm to help you find the right prices for your products.
Business errors happen all the time, but you need to address them quickly. Look at the underlying issues of the strain in finances; for example, undercapitalisation is never just problems in themselves. The information you get from these mistakes will help you become a better businessperson moving forward.
It also helps to think of financial planning as a process, not a one-off event; therefore, you should make a system, not monthly goals. For help in building a system, turn to The e-Commerce Accountant. We are a Gold Coast online accounting firm catering to small businesses. Get in touch today for more information.