Financial mistakes made by SMBs have had a tremendous impact on their business. Many companies never reopened after the lockdowns. 2020 was the worst year for businesses around the world in most sectors. The US economy was hit hard, like most other economies and shrank by 3.5% in 2020. The pandemic impacted the economic growth for the US to its lowest since World War II. The financial lessons are an integral part of how businesses need to be managed. Here’s a look at the most common mistakes made by SMBs, which can have serious impact on their business:
1. Value of Money
The value of money is critical to how a business is managed. The financial assumptions for interest rates, borrowing, working capital, inflation, return on investment, financial ratios etc. are the basics of managing a business. Many companies fail to understand the value of money they use and pay a heavy price at the end.
Good companies learn to use the capital wisely for building a business. They learn about the cost of ownership for undertaking projects by uncovering the details of each element. For e.g. the repercussion of a construction project delayed by every month can be calculated tangibly say $110,000 monthly, so for a six month delay, the business will have an impact of $666,000. The best entrepreneurs learn how money generates value for their business.
2. Understanding Inventory & Fixed Assets
Capital costs are the basis on which companies can optimise their operational costs. Many companies pay heavy penalties for high capital costs in fixed assets and inventories. Businesses have to figure out whether they need to invest upfront in fixed assets or lease them. This analysis is crucial for cash flow analysis. Some fixed assets might not have a long term value for a business, it could be rented for more beneficial returns. For e.g. heavy machinery that is not part of core business can be rented.
The effective use of depreciations can be used for offsetting profits in a business. However, using fixed assets that depreciate fast can also erode the networth of a business. Companies need to do their due diligence on how they need to use their capital for fixed assets and inventory. Excessive procurements of either inventory or fixed assets, which don’t yield can have negative consequences for a business.
3. Maintenance Costs
A lot of businesses plan for their capital costs, employee expenses and operations, but fail to calculate the maintenance costs correctly. They underestimate the maintenance costs for their business, leading to negative cash flow situations. Maintenance expenses are a major source of monthly outgoing costs. The servicing costs for maintenance of office equipment, infrastructure and facilities need to be carefully evaluated.
The budget allocation and monthly outgoing maintenance costs planning is crucial to smooth
Business operations. Unaccounted for maintenance costs are one of the major reasons for negative cash flow in a business. But when capital purchases, inventory and maintenance expenditures are well planned, things can be controlled a great deal in most situations.
4. Tax Planning & Obligations
The taxes are one of the major sources of outflow for a business. If taxes are not taken care of, they can create a lot of hurdles in a business. Taxes need to be evaluated for all essential elements in a business. For e.g. taxes spent on purchasing fixed assets will be different than regular expenses. Employee taxes will need to be planned as per the location of business. There are also different types of income taxes applicable on company revenue from operations.
Tax planning and budgeting can have a big impact on spending for a business. The profit and loss is impacted on how well a company structures its operations and optimises its spending on taxes. Many SMBs often pay a heavy price for the lack of proper knowledge in taxation and financial matters. Expert guidance can be soughted to avoid penalties, tax structuring for sales, purchases and payroll taxes as per laws of the land.
5. Maintaining up to date Accounting
Many SMBs fail to maintain upto date accounting for their business. They are playing a catch up game to file their taxes, manage compliance and accounting. But this can cause penalties, present the wrong picture of the business and underestimate the liabilities. When businesses are managed with upto date accounts, it helps to plan spending, see real time cash flow situation, bills, expenses, taxes owed and evaluate the overall picture of the business.
A lot of businesses are surprised when they do their taxes at the end of year. They miss important filing deadlines, statutory deductions and often pay hefty penalties. The best managed businesses are proactive with their bookkeeping and accounting to keep things in check.
6. Hidden Costs
The hidden costs of a business are detrimental to its growth. Companies that tend to overlook and don’t account for these costs end up with negative cash flows.
Take for e.g. an online retailer pays a credit card processing fee of 2.9% and additional $.25 for Visa cards. The business needs to integrate these costs at the time the customer purchases are made, otherwise this will have a net effect of more than 3% on the company cash flow. The company could also be paying hidden costs for many of its operations and employee expenses that are uncovered only after significant cash has been burnt.
Top companies are proactive in their planning and take into account most of these elements. Businesses need to have an in depth understanding of all the elements in their profit & loss, balance sheet & cash flow reports. Financial metrics and details are important for uncovering growth opportunities for a business. Good companies minimise the hidden costs by methodical analysis, mitigate surprises with proper budgeting and detailing. These companies also use integrated accounting software and business management tools to help them understand their business operations more efficiently.
