Money Management Principles That Will Save Your Business
Most entrepreneurs can resonate with the people and relationship side of business. Because of course, selling to customers, networking, developing business partners, and cultivating talented employees is critical to success. But as far as money matters are concerned, many business owners figure it can be turned over to their bookkeeper or CPA, without much analysis. However, just as in sales, business as a whole is a numbers game. And if you do not excel at this game, then you simply will not excel at achieving massive profits. So these are some of the most critical money mistakes I’ve seen:
Not Having At Least A Monthly Review of Your Numbers –
One thing I never understood was how a business owner can go a whole year without knowing whether or not he made a profit – until I did his tax return. There is absolutely nothing more essential to running a business than knowing: what you’re sales and expenses are, which products/services are performing best, which customers are buying the most, what you owe to whom, and what your profit is overall. This should be reviewed on a monthly basis, so that benchmarks and goals can be set to improve your quarterly and annual numbers. Otherwise, you have no basis for improvement.
Not Charging Enough For Products And Services –
I have to admit I’ve made this mistake many times myself. But the truth is, you don’t even want customers who make decisions based only on the price. And in fact, this is one of the reasons I never discuss price over the phone. If you develop your unique selling proposition thoroughly, you’ll find that it’s really not so difficult to raise your prices accordingly. And that’s what you want – customers who are wise enough to understand your unique value, and reasonable enough to pay a fair price for it.
Not Focusing On Anything But Sales –
There are countless businesses who believed sales were all that mattered, until they grew their way right into bankruptcy. Increasing sales is certainly important – because we all know “nothing happens until you sell” – but it doesn’t stop there. You need to also increase your cashflow and profits.
Not Having Accurate Product Cost Data –
Most small business owners have an idea of what their products cost them, but they don’t know their ABC’s. That is, they don’t understand Activity-Based Costing. These costs include not only the direct cost and overhead costs that go into your products, but also the specific costs of preparing your proposals, making sales, making delivery, collecting your cash, servicing the customer after the sale, etc.
Not Budgeting Cash –
If you do not prepare a cash budget – comparing your current and future expectations for cash to your actual activity – then it’s often impossible to detect cash crisis coming down the line. But if you do prepare a cash budget and project your expectations, then you can solve problems ahead of time when it’s the least expensive to do so – and potentially save your business from one of the most common reasons for failure.
Not Paying Enough Attention To Receivables –
It’s important that you have a solid accounts receivable system, which will ensure that you are on top of unpaid amounts owed to you. And to begin with, you ought to limit the amount of receivables that you are carrying anyway. Of course, you may not want to completely take away the option to extend credit, but just be sure to do your credit checks and be firm about your repayment terms.
Not Planning For Taxes –
Here’s something that you should know – if you’re CPA or tax professional is not super busy in November and December, that probably means they’re not tax planners. This makes a big difference when you understand that taxes are one of your greatest expenses – nearly a third of everything you make as an owner – and that they can be managed and reduced as well as any other expense. And these savings more than often would amount to thousands of dollars for many small business owners, if they only knew the value they were losing by not paying attention to this area of the business.
Not Having A Thorough Payroll Process –
If you have trouble keeping up with your payroll taxes, you should do whatever you can to solve this issue immediately. Although, as a small business owner, it’s probably not the best idea to do this on your own. The payroll laws are very complicated – and not keeping up with the taxes on payroll are one of the primary reasons that businesses file for bankruptcy.
Not Going Out To Find More Large Clients –
It’s easy to get complacent when you have a few large clients that cover most of your needs. But however, this is when many business owners fall behind the competition, instead of taking this opportunity to go out and find more good clients. And once you’re behind, it’s hard to catch back up – especially in times when you’re not doing as well financially. So therefore, you should always continue learning and finding new ways to apply your products/services to different clients and markets, regardless of your success with a few.
Not Turning Over The Bookkeeping Function To Someone Else
Simply put, the regular bookkeeping function should not take up the owner’s time. There are just too many higher priorities that an owner should have – related to growing and improving his business.
Not Having Proper Segregation Of Duties
When it comes to money, there are three duties that should be segregated in every business: custody, approval, and recording. For example, if you let your bookkeeper sign your checks for you, you’re not separating the duties of approval and recording, which creates a much higher risk of theft or fraud within your company. Or also, another issue that increases your risk is allowing your bookkeeper to do your reconciliations. So if you don’t want to be involved so that this proper separation occurs, then turn it over to your CPA. Because after all, there aren’t many worse feelings in business, than the one get when you find out someone has been stealing cash from you.
Not Properly Backing Up Your Systems –
Of all the assets that you hold, your data is one of the most important to protect. Because if you lose this data, that could mean the loss of your business – which has happened many times. So therefore, make sure that you are backing up your systems and work every day either on-site, off-site, or in the cloud.
Not Operating As The Right Business Entity –
Too many small business owners set up their businesses as an LLC without really knowing the implications for tax purposes. And also, too many owners assume the original entity they began with is still sufficient, although their business and circumstances have changed significantly over time. In either case, I have seen many thousands of dollars lost for business owners because their assumptions were incorrect. So if you have not yet sought out the tax implications for your entity – or haven’t done so in a while – see a tax advisor soon.