September 13, 2019

Where Does All My Money Go?

One of the most challenging issues facing small business owners is managing their cash flow and keeping track of their money. As the only way your small business is going to survive is by consistently posting profits, this should be focusing your attention.

You’ll soon find there are plenty of people with their hand in your pocket. From the ATO to bank interest and their never-ending fees to supplier payments, there are constant day-to-day demands that whittle away your revenue, without you even realising it.

It’s important to understand where your money goes. The faster you can identify where revenue is going, the faster you can start managing your cash flow more effectively.

To find out where your business is leaking money, check out these five potential problem areas and make changes in your business today.

1. Poor Cash Flow Management And Accounting

Sound cash flow management lies at the heart of any successful small business. You need to master your businesses’ cash flow and recognize its regular rhythm of outgoings and revenue inflows. If you don’t, how can you ever know where your money is going?

These days the penalties for poor accounting practices are severe. If you are slow recording sales transactions, you’ll never have a clear understanding of your cash position. if you fail to record supplier purchases your books will show you have more money than you actually do.

Similarly, accurately recording sales transactions is crucial to understanding how healthy your business is and what products or services are your best lines and what are slow to shift. Being able to move inventory is a crucial skill in keeping small businesses afloat. Avoid these errors by regularly reconciling your books, conducting internal spot audits and inventory checks. Similarly, always d use a professional accountant to maintain your company’s books.

2. Mixing Personal And Business Bank Accounts

An easy trap many small business owners fall into is mixing their private and their business accounts. Never use one bank account for both your personal and your business banking. Open a separate account for your business even if you happen to be a sole trader.

When you share an account with your business, it easy to confuse your cash with the businesses. While that may work from a personal perspective, it can leave your business exposed if supplier or GST tax payments fall due and the money isn’t there. It’s a recipe for professional disaster!

3. Poor Pricing Decisions

Pricing is an art form. Charge too much and you could find yourself without any customers. Prospective customers will see your products as being too expensive, unaffordable and will find out cheaper options.

Charge too little and you go broke. Sure, more customers will be buying your products but your prices might be so low you struggle to turn a profit.

Do your research into what type of customers you are targeting and how sensitive they are to price. Similarly, study your competitors and establish what they are charging for similar products or services.

4. Failing To Manage Expenses

One of the biggest drains on your money in a small business is your expense load. Failing to manage your expenses causes endless problems in many small businesses. Look to consolidate your purchases and try to negotiate better prices and terms with your suppliers.

Next, review your key suppliers periodically. Renegotiate frequently, particularly if your volumes are growing. This one strategy can potentially save your business thousands of dollars that would be better off in your own pocket.

Encourage suppliers to compete for your business. Ensure they know about each other, without going overboard. It’s amazing how your pricing can improve when suppliers feel competitors breathing down their neck.

Even if you intend to stay with your current supplier, the fact that both parties know you’re sourcing outside bids helps keep their pencils sharp and should lead to keener pricing.

5. Too Many Fixed Expenses

Fixed prices can leave a small business overly exposed if turbulence you’re your business. Wherever possible, ensure, as many of your expenses are variable rather than fixed. Variable expense provides you with wriggle room when your situation changes. You can dial them up or dial them down as needed, to suit the needs of the business and your cash flow situation.

Can you rent, rather than buy? Can you dip into the gig economy for expensive specialist skills and talent rather than hiring a full-time staff member? Can you lock in an option to review, rather than being contractually obliged to proceed with a deal?

Final Observation

One final point, every business needs to put an operating budget in place. Yet some small business owners forget to provide for one-off annual payments. These frequently fly under the radar. Insurance, tax adjustments, company vehicle registrations can all take a chunk out of your retained earnings and play havoc with your cash flow and undo all your hard work.

Filed Under: Accounting, Business Advisory, Financial Awareness

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