10 common small business finance mistakes

1. Over financing
Over financing is a mistake made by many small firms, and usually leads to business failure. Borrowing money and increasing interest rates on loans and charges are steps that must be taken with great caution, and you should make sure you fully understand the effects of doing so. Remember that if you fail to repay secured loans then you risk the loss of any security you have put against the loan, such as your home or business.

2. Failing to understand taxes
Many small businesses fail because they fail to understand the impact of taxes and VAT on business cash flow. It is vital that business owners are aware of which taxes are due on which dates. It is also important that money owing for taxes is set aside in a separate bank account, so that this money will not be used for any other purposes. A good accountant will help you to keep up to date with your taxes, and will help you to lower your tax bill as much as possible.

3. Confusing drawings with profits for sole traders and partnerships.
Many small business owners are under the illusion that so long as money is not withdrawn from the business (i.e. drawings), taxes will not be due. This is not true. Taxes will be owed on the profits whether the business owner withdraws cash, or leaves it in the business for expansion.

4. Failing to negotiate credit terms.
While it can be difficult for new businesses to have much sway in negotiation of credit terms, firms with an established track record should consider this carefully. Businesses should aim to offer trade debtors terms for as short a period as possible, while securing extended credit terms for as long a period as possible. This will help to speed up the cash flow cycle, and prevent cash from being held up in working capital unnecessarily.

5. Overtrading
Small, rapidly growing businesses will often sell more than their cash flow can maintain, resulting in overtrading. Business owners need to consider the effects of offering credit terms to customers, as businesses may not be able to sustain increased borrowings to fund extended periods of credit.

6. Drawing heavily on the business
It is tempting for many small business owners to think of their business as an extension of their own personal bank account. Unfortunately, this attitude will inevitably jeopardise the success of the business. If a business owner wishes to draw on funds from the business, they must do so at an appropriate and sustainable level, and should avoid the temptation to withdraw money on a whim.

7. Using incorrect pricing structures
Many businesses fail because the pricing structures they offer are not sustainable. It may be tempting to offer the lowest prices on the market, however new businesses may not have the finance structure or capital to support such a low cost structure. Prices should be set with careful consideration, as it is very difficult to raise prices once they have been established without sacrificing market share, profitability, and cash flow.

8. Over-estimating sales, under-estimating expenses
It is a common mistake to over-estimate the number of sales you are likely to achieve, and to assume that the business will incur minimal expenses. Unfortunately, this means that any cash-flow projections and profit estimations are meaningless, and will need to be recalculated. This takes up valuable time, which could be better spent focusing on business operations.

9. Failing to chase up accounts owing
Many small business owners find it embarrassing to chase up accounts owing, especially when the person doing the chasing is the same person doing the selling. To avoid this situation, you should ensure that your customers clearly understand your terms of credit in the first place, and that these are reinforced in each invoice and statement that you send. You should also vet clients thoroughly before extending any credit to them, asking for references from other suppliers and a credit reference from a credit agency.

10. Failing to allow for asset replacement
Many businesses fail to understand the implications of purchasing an expensive asset, such as a piece of machinery. Over time, most assets will need to be replaced, and doing so will usually require a cash payment. If the business is not generating sufficient cash to allow for such a purchase, then securing appropriate finance can be a real burden on cash flow.

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