Six top financial tips for small business ownersA business can’t survive on passion alone, which is why the death rate of small businesses in New Zealand is a national tragedy.
Small businesses are the backbone of our economy but, based on previous trends, roughly a quarter of all small business start-ups died within three years from 2010. Their high rate of failure is not due to a lack of passion. In almost cases, it comes down to the simple fact that they spent more money than they earned.
Sounds simple, right? Well, this is where many small business owners start the slippery slide into financial ruin – relying on their passion and underestimating the importance of the financial stuff.
Maintaining a healthy bottom line requires attention, patience, business-nouse and, sometimes, getting the right advice from the right people.
Here are our top six financial tips for small business owners:
Start modestlyIf you are just starting out, start modestly. Don’t get sucked into fancy gadgets or pricey business trips. Now is not the time to dazzle. Instead, think of spending in terms of investment. For any given purchase, ask ‘what is my potential return on this investment?’ This give you focus and help to channel your money into the things that will actually help your business succeed.
Keep your focus on the financialsToo often, bookkeeping is bumped down the priority list in favour of ‘more pressing’ issues, like bringing in customers and taking care of staff. But here’s a warning: Take your eye off the books for even just a moment and they will rewrite themselves – and the happy ending you planned for will be the stuff of fairytales.
Bookkeeping is like laundry, the more you put it off, the more the pile grows. If finances aren’t your thing, there are loads of software solutions that can do the work for you. Alternatively, out source. Getting the right financial assistance and advice is money well spent.
Cashflow - sales growth does not always equal more profitCashflow is the lifeblood of any business. It's important to understand the dynamics of your businesses' cashflow so you can ensure your liquidity is sufficient to meet your current and anticipated commitments.
All business owners should also understand the relationship between their top line and their bottom line. Top line growth indicates an increase in gross sales only, whereas bottom line growth indicates an increase in income after all expenses have been deducted - in other words, your net profit. However, sales growth does not always translate to increased profit.
You know how it is, the more you earn, the more you spend. Same goes for businesses. If you are experiencing a growth in sales, ensure you have the cashflow to pay the bills. If not check in with your accountant to really drill down into the numbers.
If you’re putting in 80-odd hours a week, you’re probably not profitableSo many small business owners underestimate the value of their own time. We’re not saying don’t put in the hours, just be careful how the time and effort you are investing personally as it could affect the company’s bottom line.
Firstly, working 80+ hours a week is probably not sustainable – when you falter, your business will suffer. Secondly, uncompensated work will also affect your company’s salability, which ultimately provides the true value of your business when it comes time to sell your business. Only by accounting for all your costs, including true labour costs, will you be able to determine how profitable you are.
Look for capital when business is goodIf growth is part of your business plan, start looking for extra capital before you need it. To get a loan or attract investors, your need a healthy cashflow and financials, a good credit rating and track record, and a solid business plan.
There’s no point looking for cash if sales are on the down and the market is contracting. Think ahead, plan ahead and act sooner rather than later.
Don’t mix business and personal financesYour business is not your personal piggybank – you can’t borrow money for a new car and you can’t top up your personal spending with your business credit card. In the least, it will create a tangled mess for your accountant to unravel; at the worst, it can send you spiraling into a financial black hole.
For a check-up on the health of your business financials, see our list of trusted business accountants.
Or check out our NZ Business for Sale Opportunities
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