When the economy tightens, many small businesses are unable to keep their doors open.
One reason for this is that in a booming economy many mistakes by management don’t come to light. High revenues can cover a lot of management error.
However, when revenues tighten, management missteps can cause the business to fail.
Here are five very common and avoidable mistakes that small businesses owners should watch for:
Poor Use of Debt
In order to start or grow a business, it is not uncommon for businesses to take on debt. The key is to structure debt in a way that will help the business.
As a consultant, I have seen business owners use short term debt for long term assets. I have also seen business owners use high-rate credit card debt when they needed permanent working capital loans.
Other businesses have taken on more debt to fund poorly managed operations. This debt caused the death of the business sooner because they did not fix the problem: they just covered it up for a period of time until the cash ran out.
Lack of a good record-keeping system
It is hard to make good financial decisions when you don’t have accurate or timely financial statements on which to base your decision. Many business owners keep their own books and don’t capture the right information.
It is important that a CPA help you set up your books and review your financial information at a minimum of once a year, more often depending on your skill level. There are several great automated accounting programs you can use, but you still need the guidance from your CPA.
Don’t assume that you don’t have to know the basics of recordkeeping to use these programs.
Poor cash flow management
Business owners often confuse profit with cash flow. As the old saying goes, “profit is what you pay taxes on, but cash is what you put in the bank.”
It is important to understand stand how cash cycles through your business and the “holes” it can get stuck in. Every business owner should be managing their receivables, inventory and payables. In other words, when it comes to cash, timing is everything.
Lack of internal controls
One of the first rules of internal control is to always separate the holder of the asset from the person responsible for the record keeping. The person handling the cash is not the same person in charge of the books.
In a small business, it is difficult to do this because you may only have one or two employees. When it comes to internal theft, it is often a trusted employee that has embezzled the company’s funds so you need to keep a constant watch on your money.
I recommend that the owner is the first person to open the bank statement and, if possible, it should be mailed to the owner’s home. All checks must be reviewed and signed by the owner.
The checkbook should be reconciled every month. Your bills should be paid by invoice not by statements. Every business owner needs to review their monthly cash receipts and cash disbursements and compare with their budget to check for deviations. At the very least, know your bank balance!
One of the first expenses that get slashed during tough times is the advertising/marketing budget. You need to be very careful in this area. It is the marketing that drives the revenue in many companies.
Instead, what business owners should be doing is measuring the effectiveness of their marketing and making sure that their dollars are wisely invested in the right marketing vehicle to reach their target market. You should have a marketing plan, a marketing budget and a defined methodology to measure effectiveness.
The above items are just few of the common mistakes made by business owners. All business owners should try to steer clear of them and constantly work “on as well as in” their business.
Lynn Vos is area director of the University of Georgia’s Small Business Development Center. Contact her at 651-3200.