It’s not unusual for small businesses in New Zealand to face financial challenges, especially when they’re just starting out. These issues typically stem from limited resources, fluctuating cash flow, and the need to make critical decisions with long-term implications.
The input of a financial expert, such as a small business accountant Queenstown entrepreneurs trust, can be quite useful in helping both seasoned and newbie enterprise owners navigate situations that can lead to these problems. At the same time, it’s a must for business owners like you to be aware of common financial blunders so that you can steer clear of them as much as possible.
Here are some of the issues you should make an effort to avoid while setting up or running your own small business:
1. Poor Cash Flow Management
Poor cash flow management occurs when businesses struggle to maintain a healthy balance between cash inflows and outflows. It often manifests as struggles to pay bills on time, delays in receiving payments from customers, or unexpected expenses cropping up without the necessary funds to cover them.
To avoid issues due to poor cash flow, your small business should learn how to create cash flow forecasts, negotiate its payment terms with suppliers, and incentivise early payments from customers. Such strategies will help you ensure that you have enough liquidity to sustain operations and seize growth opportunities in a timely manner when these crop up.
2. Underestimating Costs
Many businesses also regularly fail to forecast and budget expenses accurately, which can result in financial strain and unexpected costs. This often happens due to insufficient research about the costs of products and services, unrealistic assumptions about monthly expenditures, and failure to account for hidden or variable costs.
For example, a business may embark on a new project without fully accounting for all the expenses involved, such as labour and overhead costs. As a result, the organisation may find itself running over budget and struggling to meet its financial obligations.
Conducting thorough cost analysis before committing to projects is key to accurately estimating costs. It’s also a must to factor in potential contingencies and to regularly review and update budgets as expenses change.
3. Excessive Spending
Spending excessively can eat into profits and put small businesses at risk of financial instability. Businesses, unfortunately, do this from time to time by carrying out unnecessary office renovations or extravagant marketing campaigns that yield little to no return on investment. There are also organisations that invest heavily in expensive equipment without considering more cost-effective alternatives, like buying second-hand or prioritising essential expenses instead.
If you want to keep your company’s spending under control, you have to make it a point to establish clear spending guidelines. You also need to prioritise activities that offer the highest return on investment and regularly review your expenses to identify areas for cost savings.
4. Ignoring Budgeting
Akin to navigating without a map, ignoring your budget will make it very easy for your business to lose sight of your destination and veer off course. Without a budget, it will be difficult to allocate resources, track expenses, and plan for the future. This can even make it challenging for your enterprise to cover operating costs.
To avoid this, your business should strive to develop a lean and practical budget based on your historical data and on realistic future projections. This effort should be coupled with regularly monitoring your financial performance against budgeted targets and adjusting your spending as needed to stay on track. Embracing budgeting as a strategic tool will also enable your enterprise to make the most responsive decisions and achieve its financial goals.
5. Mixing Personal and Business Finances
Mixing personal and business finances is a recipe for confusion and potential legal and tax headaches. Commingling your personal finances with that of your business makes it more challenging to track business expenses, prepare accurate financial statements, and comply with tax regulations. If you use your personal credit card to cover business expenses, for example, then it will be difficult to distinguish between your personal and business transactions and to be conscientious about your company’s actual cashflow.
It’s good practice to maintain separate bank accounts and credit cards for business and personal use. You should also establish clear procedures for reimbursing personal expenses and keep detailed records of all your small business’s financial transactions. These steps will make it much easier to ensure clarity and accuracy in your financial reporting and minimise the risk of compliance issues.
6. Overreliance on Debt
While business loans can empower your enterprise to grow and expand, you should make an effort to avoid overreliance on debt. Depending too much on borrowed funds can leave your business vulnerable to economic downturns and interest rate fluctuations. Ultimately, this can put the enterprise’s financial stability at risk.
Before taking out a loan, then, carefully evaluate your financing options and consider alternative sources of funding such as equity investment or grants. You also shouldn’t be remiss in developing and following a sustainable debt repayment plan.
7. Not Monitoring Financial Performance
Without regular monitoring, your business will be unable to assess its financial health, which can mean that it might miss warning signs of trouble. For instance, there’s no shortage of businesses that failed because they did not notice declining profitability or cash flow problems until it was too late to take corrective action.
Stay on top of your finances by setting key performance indicators (KPIs) to track your performance. Revenue growth, profit margins, and cash flow ratios are often used as KPIs. Regularly reviewing these will better equip you to identify trends, spot potential issues early, and make timely adjustments to your enterprise’s operations.
Your ability to steer clear of these financial mistakes will factor into the success and sustainability of your small business in NZ. Sound financial management practices, as well as the advice of experts and professionals, will go a long way towards improving your enterprise’s financial health and achieving your organisation’s long-term goals.
If you need expert financial advice or accounting services for your small business in Queenstown, reach out to our team at Target Accounting. We’ll help you carry out tried-and-tested strategies to avoid these financial blunders that many business owners know way too well. Get in touch with us at Target Accounting today.