Finances and financial planning and analysis (FP&A) are at the core of the success of your business. If you don’t create a proper budget, accurate projections, and account management, your business will crumble and fall. But even if this is an obvious fact, many businesses still fail to make financial planning a priority.
Fortunately, by avoiding a few financial planning mistakes, you can significantly improve the chances of your business succeeding. To help you out, here are five common business financial mistakes you should avoid at all costs.
Not Having A Cash Reserve
Unexpected situations that require finances can crop up anytime. This happens in life and business. Issues like equipment breakdown or the need for additional materials say in the construction business, occur all the time. If an essential part of your equipment fails, do you have funds set aside for repairs or hire equipment in the meantime?
These expenses are inevitable, and you should have an adequate plan for them. Emergency loans will become a staple for your business if you don’t have any amount set aside for such expenses. You may also be forced to pull funds from other areas of the business, distorting your entire budget. But when you have a reserve for these emergencies, you’re able to manage emergencies more efficiently.
Since all businesses have varied needs and emergencies, those who offer financial planning consulting services, like FP&A consulting, can help you with this issue, particularly coming up with the ideal amount to set aside.
Not Basing Projections On Actual Performance
Creating financial projections is a crucial part of planning as it helps you estimate future revenue and expenditure. A financial projection also helps determine your operating budget for both your business’ short- and long-term goals. The projections are typically based on past income and expenditure, as well as future estimates. However, projections need constant updating as projects begin and if any changes occur.
You can’t accurately predict what’ll happen in the future. Your financial projection may be interrupted by issues, like changes in tax laws requiring you to pay more than projected. The business performance can also fall below the estimates, like what happened when the COVID-19 pandemic struck. Regularly reviewing your projections allows you to know your business standing and make an appropriate plan.
Failing to keep the projections as updated and accurate as possible is a critical mistake you need to avoid making. If you fall short of your predictions for any reason, it can render your entire budget useless and leave you without funds to run operations. Thus, periodically review your projections to avoid such a situation.
Unorganized Accounts Receivable
The goal of any business is to make money, and invoicing is a considerable part of that goal. But many businesses still neglect their account receivables. You need to have a system in place that ensures clients make timely payments. One of the most challenging situations in companies is when clients fail to pay. This is because it leads to cash flow problems and uncertainty in the future of your business.
If you don’t have an invoicing system to help track, monitor, and ensure that invoices are paid, you might be losing a significant portion of your revenue out. If that’s the case on your part, you should do an overhaul of your systems. The good news is there are many online invoicing tools available to help in that regard.
Look for an invoicing tool that matches your business needs and one you can integrate with other functions of your business. By having an appropriate invoicing tool, you may fix any mix-ups, errors, duplications, and invoice loss that eventually leads to lost revenue.
Failing To Plan For Taxes
A business has different tax obligations, depending on its size, type of business, and location. Taxes take a significant portion of your revenue annually and particularly if you have employees. Experts advise making estimated quarterly payments to the taxman to avoid paying substantial sums in taxes at the end of a tax year.
Adequately planning for taxes can help you take active steps to reduce the business taxes you legally owe. This can help you reduce operating expenses, put some amount back into your pockets, and keep your business running.
Inadequate Business Insurance
The very nature of life is highly unpredictable, and it’s possible to lose your assets or income due to various reasons. To protect your business against financial losses, you need to have a proper insurance cover in place.
One of the mistakes many business owners make in this area is canceling policies without new ones in place. Another one is not having the appropriate cover for the business. To solve this issue, first, you need to ensure that your business is covered at all times. Second, you need to have the proper cover for your business circumstances. This can help you protect your financial and professional reputation should anything happen.
Without adequate insurance cover in place, there’s no telling what can happen if your business burnt down or your employees sued you for damages.
Taking A Do-It-Yourself Approach
Financial planning requires a lot of learning and research. If you don’t know much about financial matters, it’s not worth doing it yourself. In addition, a business has many other functions that need your complete focus. So, you need the help of a financial planner if you want to stay on the right path and stick to the financial strategies you have in place.
One of the biggest mistakes, when you decide to do your own finances, is mixing your personal and business finances. This is because a mistake on one side can ruin the other side. A financial professional can help you balance your accounts and ensure that you track your revenue and expenditure properly.
You don’t have a reason to let your business fade away and fail. At least not due to financial planning mistakes that you can easily avoid. Seemingly small mistakes can lead to huge financial losses or business failure. Your long-term business success depends on how well you plan your finances. Avoiding the mistakes discussed above can help you eliminate a lot of other financial problems down the road.
Jason is the Marketing Manager at a local advertising company in Australia. He moved to Australia 10 years back for his passion for advertising. Jason recently joined BFA as a volunteer writer and contributes by sharing his valuable experience and knowledge.